Wednesday, February 2, 2011

Ilargi: As the White House role-plays anger over Mubarak's goon-squads beating up on the very same people it lauded only yesterday, it might be good to remember that the Egyptian president has been a US and Israel puppet for 30 years, and that he's consistently been the number 1 US ally when it comes to renditions, torture and disappearances in the aftermath of 9/11. By the way, whatever happened to Guantanamo Bay? Wasn't there a promise to close it 2 years ago at a certain president's inauguration? Is that the sort of timeframe we're to expect when Hillary robot-talks about a "smooth transition"?

Big demo coming up tomorrow in Yemen, Middle East capital of destitution, and on Friday in Egypt, another Mubarak deadline, this one from ElBaradei: be gone at the latest right after the afternoon prayer. This one ain't over by a long mile, and Obama has so badly failed to recover the ball he fumbled, one would almost think he does it on purpose. The Cairo protesters are not all of a sudden going to go home as if nothing ever happened, and obediently drink tea until September, quietly watching Mubarak and his masters loot their country for whatever is left that has any value. Not an option.

But we'll deal with that over the next few days. It seems more appropriate right now to talk about things that might make Americans think about the degree to which their own country resembles the likes of Egypt and Yemen, in that a chosen few get to squeeze life and happiness and freedom out of its masses.

And yes, for that we need to return to the broken American Dream of owning one's own home. Because that is how the average man and woman, and their liberty, are being renditioned stateside. Zach Carter looks at Fannie and Freddie and whatever may come after, for the Huffington Post. It makes you wonder how much longer Americans will believe they are better off than the desperate but hopeful families they see march with conviction in Cairo:

Quiet discussions are going on between Washington and New York's financial elite circles to chart a course forward for the mortgage market and the federal government's role in it. The loan-guarantee structure built during the Great Depression, which created the 30-year mortgage, spiraled out of control over the past decade as banks took advantage of the government backing to dump garbage loans on the taxpayer. The housing collapse led to the seizure of Fannie Mae and Freddie Mac, which the government now holds in limbo as banks continue to back up garbage trucks and deposit the waste of the past decade.

How to reform this system while maintaining continuity of the availability of affordable, 30-year mortgages is the question facing policymakers. How to make billions of dollars while doing it is the question facing banks. Now, a leading liberal think tank has put forward a reform agenda similar to that of the banks. Last week, the Center for American Progress (CAP) rolled out its plan to reform the government-owned mortgage giants currently propping up the U.S. housing market.[..]

The U.S. government currently backs 90% of all new mortgages, with Fannie Mae and Freddie Mac the biggest players. The firms buy mortgages from banks, package them into securities and sell them to investors. If loans in the securities default, Fannie and Freddie take losses, rather than investors.[..]

The CAP report is written by its mortgage finance working group, which features several housing experts otherwise unaffiliated with the think tank. The report recommends replacing Fannie and Freddie with new private, for-profit firms which buy up mortgages from banks, package them into securities and sell them to investors. The government would explicitly guarantee investors in these securities against losses, but would not guarantee the new firms themselves against losses. If the mortgages default, though, it's still the government that loses money, rather than the firms.

The same general recommendation was put forward in September 2009 by the Mortgage Bankers Association, a major D.C. lobbying firm that includes some of the nation's largest banks. And it's easy to see why bankers like the idea -- it means big money for Wall Street. In the CAP report, these new Fannie-and-Freddie-like firms would be replaced with "Chartered Mortgage Institutions" or CMIs. In the MBA report, they're referred to as "Mortgage Credit Guarantee Entities," or MCGEs. But there's a key, very profitable difference between these proposals and the current system: Banks could share ownership of the new firms, taking in fees created by securitizing mortgages that the government guarantees against losses.[..]

The CAP report explicitly suggests allowing banks to share ownership of the new firms, along with two other ownership structures, but does warn that, "a cooperative owned by very large originators could potentially become so dominant as to crowd out other CMIs." Even before the heated days of the housing bubble, Fannie and Freddie reaped enormous profits from its mortgage securitization and guarantee business. The CAP plan would allow banks to score the profits previously enjoyed by Fannie and Freddie, while sticking taxpayers with the risk.

"This whole cooperative idea, handing the banks the keys to the kingdom to become the new GSEs, that's just a terrible plan," says Joshua Rosner, a former GSE analyst who now works as a managing director for Graham Fisher & Co. "Why create a new class of too-big-to-fail GSEs? The banks have wanted to be the GSEs forever, and now they think they've finally got their chance."

But even if financial firms were barred from owning the new Fannie-and-Freddie-like firms, the benefits from the government guarantee on mortgages will still flow directly to banks, and only indirectly to taxpayers. With the government standing behind any losses, banks that extend mortgages to borrowers would not have to worry about losing money if a borrower failed to repay the loan.

Ilargi: As Phil Mattingly and Lorraine Woellert write for Bloomberg, Congress keeps on shadow-boxing over this potato that's so hot no-one in Washington wants to be found anywhere near it, for fear of contagion:

Republicans and Democrats have battled for years over the dual role of Washington-based Fannie Mae and Freddie Mac of McLean, Virginia, as publicly traded companies whose charters require them to help promote U.S. housing policy. The fight has intensified since the government placed the two companies in conservatorship, with some House Republicans arguing for full privatization of mortgage finance.

Dodd-Frank, the biggest overhaul of financial-industry regulation since the 1930s, didn’t directly address mortgage finance, instead requiring the administration to deliver before the end of January a proposal for restructuring the system. The administration has told the Financial Services Committee that the report would be delayed and that Treasury would send a "comprehensive mortgage reform to Congress in the next week or so," Adamske said. Bachus, who became chairman this month as Republicans took control of the House, has scheduled three committee hearings to address the administration’s proposals.

Ilargi: But while the fine people on Capitol Hill who are ever so dedicated to public service, keep on blaming each other for the fact that water's blue, those who voted them into office find themselves caught in an irresistibly whirling downward spiral. Here's Diana Olick at CNBC:

usually find the quarterly homeowner vacancy and homeownership report from Census pretty lackluster, but the latest one released this morning was anything but. America's home ownership rate, after holding steady for a while, took a pretty big plunge in Q4, from 66.9 percent to 66.5 percent. That's down from the 2004 peak of 69.2 percent and the lowest level since 1998.

Homeownership is falling at an alarming pace, despite the fact that home prices have fallen, affordability is much improved and inventories of new and existing homes are still running quite high. Bargains abound, but few are interested or eligible to take advantage.

More concerning than the home ownership rate is the vacancy rate. The Census tables don't tell the entire story, but they tell a lot of it. Of the nearly 131 million housing units in this country, 112.5 million are occupied. 74.8 million are owned, and that's only dropped by about 30 thousand in the past year. 38 million are rented, but that's up by over a million year over year. That means more new households are choosing to rent.

Now to vacancies. There were 18.4 million vacant homes in the U.S. in Q4 '10 (11 percent of all housing units vacant all year round), which is actually an improvement of 427,000 from a year ago, but not for the reasons you'd think. The number of vacant homes for rent fell by 493 thousand, as rental demand rose. 471,000 homes are listed as "Held off Market" about half for temporary use, but the other half are likely foreclosures.

Ilargi: Michael Snyder at Economic Collapse, who likes making lists at least as much as Winnie the Pooh likes having "a little something", made another one of those, from which I’ll pick a few:

#5 According to RealtyTrac, a total of 3 million homes were repossessed by mortgage lenders between January 2007 and August 2010. This represents a huge amount of additional inventory that somehow must be sold.

#8 It is estimated that there are about 5 million homeowners in the United States that are at least two months behind on their mortgages, and it is being projected that over a million American families will be booted out of their homes this year alone.

#9 Deutsche Bank is projecting that 48 percent of all U.S. mortgages could have negative equity by the end of 2011.

#11 According to Zillow, U.S. home prices have already fallen further during this economic downturn (26 percent) than they did during the Great Depression (25.9 percent).

#12 There are very few signs that the employment situation in the United States is going to improve any time soon. 4.2 million Americans have been unemployed for one year or longer at this point. While there has been some nominal improvement in the government unemployment numbers recently, other organizations are reporting that things are getting even worse. According to Gallup, the unemployment rate actually rose to 9.6% at the end of December. This was a significant increase from 9.3% in mid-December and 8.8% at the end of November.

Ilargi: Now set these numbers against the light of what you just read above, about plans that are being developed for Fannie and Freddie and their successors. Plans, in essence, to involve Wall Street banks even deeper into the way every single American, and his/her kids, are made financially responsible for all of their neighbors' home purchases. Yeah, I know, it isn't really something new, Fannie and Freddie have been around for decades, and America has prospered, or at least appeared to. So why couldn't we keep on running these programs?

First of all, Fannie and Freddie already ran such enormous losses by 2008 that they "had to be taken over", i.e. made your liability.

Second, according to the Case/Shiller Index, US homes on average lost close to 30% of their "value", much of it after Fannie and Freddie were taken over. That represents something like $6-$7 trillion. And through Fannie and Freddie, $3-$4 trillion of that, at the very least, has now become a liability of the Treasury, the US government, and in the end the American citizen. Who's on the hook for that on top of the 30% loss in value (s)he's suffered on her own home. Or maybe (s)he was renting, or (s)he was too young to either rent or buy when the walls came down, and now finds that asking prices are -still- unaffordable, and mortgage loans unavailable. Or (s)he's already lost her job and/or home, in which case it's pretty safe to say (s)he's not a potential buyer (anytime soon). (S)he's still on the hook, though.

Third, if you would want to add up the pre-takeover losses and the ones incurred since, you wouldn't get anywhere, because you're not allowed to know. Why not? Because the streets of Washington might start to resemble those of Cairo. Taking over Fannie and Freddie was, perhaps more than anything, a measure aimed at hiding their losses as long as possible. Which puts any plans for wind-downs and successors for the firms in an extremely bleak light.

Washington has devised novel accounting (non-)standards for the mortgage- and larger financial sectors that would never be accepted for anyone else. Indeed, if you tried, you'd be thrown into jail for fraud, and for many years. If you want to try and imagine how bad the housing crisis is -already-, and the financial crisis as a whole, all you need to ask yourself is why we're not allowed to see the losses on paper. Why the US government, despite taking over Fannie and Freddie, refuses to put their assets and liabilities on its balance sheet (more accounting fraud innovation), and why the Federal Reserve allegedly has the intention of letting the trillions of dollars in mortgage backed securities it now has on its balance sheet run to maturity, while transferring the too-obvious losses straight to the Treasury a.k.a. you.

It's all about hiding the losses. Hiding them from Main Street Americans, from their pension funds, from stock exchanges, and from foreign investors. And those foreign investors, by the way, would have been up in arms long ago if not for both the explicit and implicit guarantees that all losses will down the line be incurred by Main Street Americans.

Between robo-signing, lost paper trails, non-backed MBS and other derivatives, and most of all through fraudulent accounting, every single US mortgage is in limbo. This doesn't just wreak havoc with the homeowner and taxpayer, it also has another effect: it allows for the perverse fact that Wall Street pay-outs in 2010 are higher than ever, as Aaron Lucchetti and Stephen Grocer report in the Wall Street Journal:

When it comes to paychecks, Wall Street's law of gravity is back in full force: What goes down must come back up. In 2010, total compensation and benefits at publicly traded Wall Street banks and securities firms hit a record of $135 billion, according to an analysis by The Wall Street Journal. The total is up 5.7% from $128 billion in combined compensation and benefits by the same companies in 2009.

The increase was fueled by a revenue rebound as the financial crisis recedes in the rearview mirror. At 25 large financial firms that have reported full-year results, revenue rose to $417 billion, another all-time high, even though last year's 1% increase was just a fraction of the industry's revenue jolt from 2008 to 2009 as trading and investment banking sprang back to life. "Things are shifting back to where they were before," said J. Robert Brown, a law professor at the University of Denver who studies compensation and corporate-governance issues.

Ilargi: Home prices have fallen further already than in the Great Depression, a record 43 million Americans rely on foodstamps, anywhere between 9.4% and 22% are out of a decent living-wage job, over 1 million homeowners were foreclosed on, well over 3 million will receive a foreclosure notice in 2011, and there's nothing in sight to stop these trends.

However, we're being fooled into believing that hope and change are just around the corner, by rising stock markets, and by record paydays on Wall Street. Happy days are here again... Now, I find it incomprehensible that anyone who's not a direct beneficiary would see rising stocks and banker paydays as a sign that their own lives are on the verge of improving. In fact, the exact opposite is true: stocks are high only because your money is being used to keep them there, and Wall Street bankers are being paid record bonuses only with your money.

Tell me again, how is America essentially different from Egypt? Watching the events in Cairo, do you get the idea that Egyptians feel better, or ever have done so, because the top 1% wealthiest among them get their water from golden faucets? And if not, why do you over here?

I’m starting to think the Egyptians are better off, for they feel certain they have indentified what's ailing them: their own government. And they've decided enough is enough, and they're going to do something about it.

Quiet discussions are going on between Washington and New York's financial elite circles to chart a course forward for the mortgage market and the federal government's role in it. The loan-guarantee structure built during the Great Depression, which created the 30-year mortgage, spiraled out of control over the past decade as banks took advantage of the government backing to dump garbage loans on the taxpayer. The housing collapse led to the seizure of Fannie Mae and Freddie Mac, which the government now holds in limbo as banks continue to back up garbage trucks and deposit the waste of the past decade.

How to reform this system while maintaining continuity of the availability of affordable, 30-year mortgages is the question facing policymakers. How to make billions of dollars while doing it is the question facing banks. Now, a leading liberal think tank has put forward a reform agenda similar to that of the banks. Last week, the Center for American Progress rolled out its plan to reform the government-owned mortgage giants currently propping up the U.S. housing market. Progressive critics have been quick to cry foul.

The U.S. government currently backs 90 percent of all new mortgages, with Fannie Mae and Freddie Mac the biggest players. The firms buy mortgages from banks, package them into securities and sell them to investors. If loans in the securities default, Fannie and Freddie take losses, rather than investors. From 1968 to 2008, the companies, known as government-sponsored enterprises (GSEs), were officially private, for-profit firms, but an implied government guarantee led investors to believe they would be bailed out in the event of a crisis, a belief which proved true in the summer of 2008. That view distorted market incentives, encouraging the entities to take on big risks in order to score big profits.

The government took control of the mortgage giants under the terms of the bailout, which the Federal Housing Finance Agency currently expects to cost taxpayers $151 billion, although the total price tag could reach $259 billion if the economy sours further.

The CAP report is written by its mortgage finance working group, which features several housing experts otherwise unaffiliated with the think tank. The report recommends replacing Fannie and Freddie with new private, for-profit firms which buy up mortgages from banks, package them into securities and sell them to investors. The government would explicitly guarantee investors in these securities against losses, but would not guarantee the new firms themselves against losses. If the mortgages default, though, it's still the government that loses money, rather than the firms.

The same general recommendation was put forward in September 2009 by the Mortgage Bankers Association, a major D.C. lobbying firm that includes some of the nation's largest banks. And it's easy to see why bankers like the idea -- it means big money for Wall Street. In the CAP report, these new Fannie-and-Freddie-like firms would be replaced with "Chartered Mortgage Institutions" or CMIs. In the MBA report, they're referred to as "Mortgage Credit Guarantee Entities," or MCGEs. But there's a key, very profitable difference between these proposals and the current system: Banks could share ownership of the new firms, taking in fees created by securitizing mortgages that the government guarantees against losses.

"The ownership of at least one of the MCGEs could be in a co-op form with mortgage lenders as shareholders," the MBA report reads. The CAP report explicitly suggests allowing banks to share ownership of the new firms, along with two other ownership structures, but does warn that, "a cooperative owned by very large originators could potentially become so dominant as to crowd out other CMIs." Even before the heated days of the housing bubble, Fannie and Freddie reaped enormous profits from its mortgage securitization and guarantee business. The CAP plan would allow banks to score the profits previously enjoyed by Fannie and Freddie, while sticking taxpayers with the risk.

"This whole cooperative idea, handing the banks the keys to the kingdom to become the new GSEs, that's just a terrible plan," says Joshua Rosner, a former GSE analyst who now works as a managing director for Graham Fisher & Co. "Why create a new class of too-big-to-fail GSEs? The banks have wanted to be the GSEs forever, and now they think they've finally got their chance."

But even if financial firms were barred from owning the new Fannie-and-Freddie-like firms, the benefits from the government guarantee on mortgages will still flow directly to banks, and only indirectly to taxpayers. With the government standing behind any losses, banks that extend mortgages to borrowers would not have to worry about losing money if a borrower failed to repay the loan. That means plenty of risk-free fees for banks, as taxpayers explicitly assume risk.

The plan is not without benefits to consumers. Its proponents emphasize that the arrangement will keep mortgages cheap and readily available. If banks don't have to take on any risk, they don't have to charge much for loans, either. And some losses for taxpayers would be cushioned by an FDIC-like insurance fund, which the new mortgage giants would pay into.

Critics of the plan acknowledge that it would keep interest rates on mortgages lower than they would be absent a government guarantee. But they argue that subsidizing housing can be better achieved through the tax code, rather than a complex mortgage finance system that reinforces Too Big To Fail, by creating a new set of firms critical to the functioning of the U.S. housing market. And investors may not believe the government when it says it will not bail out the new firms -- that was the official government stance on Fannie and Freddie for years. If the market views the new firms as too big to fail, critics envision the entire GSE disaster repeating itself.

The MBA report calls for "two or three" new GSEs at first, but would give the government the authority to charter additional firms. David Min, who heads CAP's mortgage finance working group, told HuffPost that their plan doesn't specify how many firms could act as Fannie-and-Freddie-like firms. "We can't really predict," Min said. "It depends on how much private capital comes in."

Rosner, the former GSE analyst, said the CAP model only makes mortgages less expensive by increasing systemic risk. More direct housing subsidies would not have that problem, he said. "If we're concerned about people who will not have access to credit, take that out of the GSEs and housing finance and call it housing policy," Rosner said. "If we believe that there are specific borrowers who need access to credit, then it seems to me those should be explicit government programs."

In a March report, Raj Date, then head of the think tank Cambridge Winter Center for Financial Institutions Policy, argued that tax subsidies were a much more efficient method for promoting homeownership than a taxpayer-backed housing finance system, which creates enormous systemic risks. Date, now a top adviser to Elizabeth Warren at the Consumer Financial Protection Bureau, declined to comment for this story. "[The government should] create transparent homeownership subsidies, or none at all," Date wrote in March. "If . . . policy-makers decide to continue promoting artificially high levels of homeownership, more straight- forward cash subsidies (through refundable low-income tax credits, for example) would be both simpler than GSE intermediation and less prone to catastrophic error."

Rosner suggested two major changes to the tax system and two major reforms to the mortgage finance system. The actual home finance system would benefit from a standardized loan contract and a standardized, transparent private-sector securitization contract, he said, so that investors can know they're investing in safe loans when they buy mortgage securities. A new, purely government-owned entity would stand ready to insure mortgages against default when capital markets break down, he said, so that the housing market can continue to function when Wall Street stumbles. In order to provide clarity to markets, this government body would publish information on what it would cost to insure mortgages against default every day, but not actually insure any loans until markets break down.

Rosner readily acknowledges that mortgages under his plan would be more expensive than the CAP plan, but notes that artificially-cheap mortgages fueled a destructive housing bubble in recent years. "My investing clients would buy mortgages hand over fist if there were clear contractual definitions and if rates were allowed to meet market risks," says Rosner. "That would mean that the 30-year fixed-rate mortgage would be trading at about 6 percent." Mortgage rates are currently about 4.5 percent -- significantly less expensive when applied to a $200,000 loan.

So Rosner suggests two changes to the tax system to make mortgages cheaper. First, the government should create a program similar to existing college savings plans that allows people to save money for a down payment on a tax-free basis. Second, he argues that the government should replace the mortgage-interest deduction, which costs taxpayers about $250 billion a year, with a tax break based on paying down a mortgage and increasing equity in a house. The mortgage interest deduction rewards borrowers for taking on debt, while an equity deduction would encourage borrowers to pay off their loans. Banks like the mortgage interest deduction because it encourages people to take on debt, and banks are in the debt business.

But authors of the CAP report insist that mortgages will not simply become more expensive without a persistent government guarantee, but say the convenient mortgage that has dominated the U.S. housing market for nearly 80 years will disappear altogether. "The 30-year fixed-rate mortgage is a very difficult product from both an interest rate risk and credit risk perspective," former Office of Thrift Supervision Director Ellen Seidman, one of 19 co-authors of the CAP report, told HuffPost. "It's not going to happen without some kind of government backing."

Instead, the report's authors warn, the mortgage market will see shorter-term loans that are far more expensive, pushing homeownership out of reach not only for low-income borrowers, but for all but the very wealthy. Rosner thinks the claim is ridiculous. "If there was demand for the 30-year product, the banks would have to meet that market demand," he told HuffPost. "It's been around for 80 years. People are not going to stop wanting this product."

Some conservatives are similarly nonplussed. "The rate on a 30-year mortgage set in a true market would probably be somewhat higher than a rate when it's subsidized by government guarantees, either explicit or implicit," said Alex Pollack, a former Federal Home Loan Bank of Chicago president who currently works as a fellow for the right-wing American Enterprise Institute. "But it would be a rate without the distorting effects of that guarantee, in which with your slightly cheaper interest rate, you make the house more expensive."

In his March report, Date noted that the government could still find ways to subsidize 30-year fixed-rate mortgages without simply guaranteeing banks against mortgage losses. "[The government could] create a transparent fixed-rate mortgage subsidy, or none at all," Date wrote. "If policy-makers wish to continue to support the availability of long-term, fixed-rate mortgages, they should consider doing so directly (e.g., perhaps through a direct, subsidized rate swap facility sponsored by the Fed)."

But it's also not obvious that losing the 30-year fixed-rate mortgage would actually have a significant impact on home affordability or accessibility. In Canada, for instance, mortgage loans are typically of a 5-year duration, but remain affordable, while Canada's home ownership rate is nearly identical to that of the U.S.

"Prime Canadian homeowners are well served by their mortgage finance system, with accessibility and costs roughly in line with those in the United States," economist John Kiff wrote in a 2009 paper for the International Monetary Fund. "Even though Canadian mortgage markets may seem less innovative than in the United States, consumers seem to be well served. In particular, homeownership in those countries is virtually identical at about 68 percent of all households."

The U.S. Treasury Department is expected to issue its own report on the future of Fannie and Freddie in the next couple of weeks, after missing a congressionally-mandated Jan. 31 deadline. A Treasury spokesman declined to comment on the CAP proposal.

This was produced in partnership with The Dylan Ratigan Show's weeklong "No Way To Live" series on the financial crisis and its impact on ordinary Americans.

U.S. policy makers have become embroiled in a partisan war of words over the Treasury Department’s decision to delay a report on the future of government-owned mortgage companies Fannie Mae and Freddie Mac. Representative Spencer Bachus, the Alabama Republican who- leads the House Financial Services Committee, said today that President Barack Obama’s Democratic administration "had no legitimate reason" for missing the report deadline imposed by the Dodd-Frank Act, which Obama signed in July.

"It is clear the Administration cannot make any tough choices required to protect taxpayers and end the bailout of Fannie and Freddie," Bachus said in a statement. "Taxpayers do not need more empty promises for reform, they need a real plan to stop the administration and Treasury Department from throwing more taxpayer dollars down the Fannie and Freddie rathole."

Fannie Mae and Freddie Mac, the government-sponsored enterprises that own or guarantee more than half the U.S. mortgage market, have been surviving on taxpayer aid since they were seized by the federal government in 2008 amid losses linked to subprime loans. They have drawn more than $150 billion from the Treasury to remain solvent. "The Republicans were in charge of Congress for 12 of the past 16 years and failed each and every year to send meaningful GSE underwriting or predatory lending reforms to the president’s desk," Steve Adamske, a Treasury Department spokesman, said today in a response to Bachus’s comments.

Dual RoleRepublicans and Democrats have battled for years over the dual role of Washington-based Fannie Mae and Freddie Mac of McLean, Virginia, as publicly traded companies whose charters require them to help promote U.S. housing policy. The fight has intensified since the government placed the two companies in conservatorship, with some House Republicans arguing for full privatization of mortgage finance.

Dodd-Frank, the biggest overhaul of financial-industry regulation since the 1930s, didn’t directly address mortgage finance, instead requiring the administration to deliver before the end of January a proposal for restructuring the system. The administration has told the Financial Services Committee that the report would be delayed and that Treasury would send a "comprehensive mortgage reform to Congress in the next week or so," Adamske said. Bachus, who became chairman this month as Republicans took control of the House, has scheduled three committee hearings to address the administration’s proposals.

That's not entirely surprising. Prices are falling, and there's little market expectation they're going to rise anytime soon, so buyers are choosing not to get in. High supply is also keeping prices down and the vacancy rate might be even more alarming.

Approximately 85.9 percent of the housing units in the United States in the fourth quarter 2010 were occupied and 14.1 percent were vacant. Owner-occupied housing units made up 57.2 percent of total housing units, while renter-occupied units made up 28.8 percent of the inventory in the fourth quarter 2010. Vacant year-round units comprised 10.8 percent of total housing units, while 3.3 percent were for seasonal use.

But, when you look at this data, it's not like the U.S. is completely our of sorts historically. We've only fallen back a decade, and that was a decade associated with a housing bubble. So maybe this return to norm is a good thing?

I usually find the quarterly homeowner vacancy and homeownership report from Census pretty lackluster, but the latest one released this morning was anything but. America's home ownership rate, after holding steady for a while, took a pretty big plunge in Q4, from 66.9 percent to 66.5 percent. That's down from the 2004 peak of 69.2 percent and the lowest level since 1998.

Homeownership is falling at an alarming pace, despite the fact that home prices have fallen, affordability is much improved and inventories of new and existing homes are still running quite high. Bargains abound, but few are interested or eligible to take advantage.

More concerning than the home ownership rate is the vacancy rate. The Census tables don't tell the entire story, but they tell a lot of it. Of the nearly 131 million housing units in this country, 112.5 million are occupied. 74.8 million are owned, and that's only dropped by about 30 thousand in the past year. 38 million are rented, but that's up by over a million year over year. That means more new households are choosing to rent.

Now to vacancies. There were 18.4 million vacant homes in the U.S. in Q4 '10 (11 percent of all housing units vacant all year round), which is actually an improvement of 427,000 from a year ago, but not for the reasons you'd think. The number of vacant homes for rent fell by 493 thousand, as rental demand rose. 471,000 homes are listed as "Held off Market" about half for temporary use, but the other half are likely foreclosures. And no, the shadow inventory isn't just 200,000, it's far higher than that.

So think about it. Eleven percent of the houses in America are empty. This as builders start to get more bullish, and renting apartments becomes ever more popular. Vacancies in the apartment sector have been falling steadily and dramatically, why? Because we're still recovering emotionally from the toll of the housing crash. Younger Americans have seen what home ownership has done to their friends and families, and many want no part of it. Credit has become very nearly elitist. Home prices, whatever your particular data provider preference might be, are still falling.

Following up on yesterday's post on the latest homeowner vacancy report, I wanted to point out a significant shift in the makeup of not just how, but where we live. While the overall number of empty homes rose nationwide, the biggest vacancy jump was in what's called "principal cities." These are the lower income, higher crime areas that Fannie Mae and Freddie Mac and prior administrations tried to bolster homeownership in. It’s close-in areas that are not attractive, according to Stephen East of Ticonderoga Securities.

Vacancy rates actually fell in the suburbs to 2.3 percent in Q4 '10 from 2.5 percent a year ago and 2.4 percent in Q3. The increase in the overall rate was really driven by a 3.6 percent vacancy rate in "principal cities," up from 3.1 percent a year ago and 2.9 percent in Q3. "The increase in the vacancy rates in principal cities continues to illustrate the hangover from the 'ownership society' supported by the Clinton and Bush administrations," notes East.

"We speak often to clients about the dichotomous market that does not get enough attention. Draw concentric rings around a city center. Two primary areas that drive the housing malaise—in close, out far. The sweet spot belt in nearly every city is seeing a significantly better housing market than broad numbers show. Fortunately, this is where most of today’s qualified buyers want to live."

I am not sure why that's fortunate. The "sweet spot belts" around the country have not seen nearly the foreclosures nor the price drops that the close-in and far out bands have seen, so we don't need so much demand there. There needs to be more demand in the "principal cities," but it's just not there. Prices have dropped the most, and most borrowers there are lower income and cannot qualify in today's tough mortgage market. That's why, again, apartment rentals are seeing such high demand.

"Fannie Mae is a leading provider of capital and liquidity for affordable workforce rental housing, and our role is more important now than ever," said Kenneth J. Bacon, Executive Vice President, Multifamily Mortgage Business. "When many financial institutions pulled out of the multifamily financing market during the financial crisis, we stayed and increased our participation to help keep credit flowing."

Fannie is putting more than $20 billion behind multi-family financing, as builders ramp up production. The reason rents are rising so much is because there is not enough stock, unlike the single-family market. During the housing boom, many developers did condo-conversions, turning apartment rental buildings into condos to meet the over-exuberant demand. Now developers are rushing to build as fast as they can. Reis Inc. predicts 51,314 units will be completed in 2011, and 82,971 units in 2012, and CoStar predicts over 100,000 will be completed in 2012 (many of those likely starting now). All because the inner-city ownership society is no more.

I also believe it's not just the inner-city, low-income resident who is renting; as I noted yesterday, I think renting is now much more acceptable to affluent younger workers and ever more enticing to empty-nesters. Given the rise in both those populations, multi-family has nowhere to go but up and ownership will need something of a makeover.

We are officially in the middle of the worst housing collapse in U.S. history - and unfortunately it is going to get even worse. Already, U.S. housing prices have fallen further during this economic downturn (26 percent), then they did during the Great Depression (25.9 percent). Approximately 11 percent of all homes in the United States are currently standing empty. In fact, there are many new housing developments across the U.S. that resemble little more than ghost towns because foreclosures have wiped them out.

Mortgage delinquencies and foreclosures reached new highs in 2010, and it is being projected that banks and financial institutions will repossess at least a million more U.S. homes during 2011. Meanwhile, unemployment is absolutely rampant and wage levels are going down at a time when mortgage lending standards have been significantly tightened. That means that there are very few qualified buyers running around out there and that is going to continue to be the case for quite some time to come. When you add all of those factors up, it leads to one inescapable conclusion. The "housing Armageddon" that we have been experiencing since 2007 is going to get even worse in 2011.

Right now there is a gigantic mountain of unsold homes in the United States. It is estimated that banks and financial institutions will repossess at least a million more homes this year and this will make the supply of unsold properties even worse. At the same time, millions of American families have been scared out of the market by this recent crisis and millions of others cannot qualify for a home loan any longer. That means that the demand for unsold homes is at extremely low levels.

So what happens when supply is really high and demand is really low?

That's right - prices go down.

Hopefully housing prices don't have too much farther to go down. Ben Bernanke and the boys over at the Federal Reserve are doing their best to flood the system with new dollars in order to prop up asset values, but you just can't create qualified home buyers out of thin air.

Many analysts are projecting that U.S. housing prices will decline another ten or twenty percent before they hit bottom. In fact, quite a few economists believe that the total price decline from the peak of the market in 2006 will end up being somewhere in the neighborhood of 40 percent.

But whether prices go down any further or not, the truth is that the housing crash that we have already witnessed is absolutely unprecedented.

The following are 12 facts which show that we are in the midst of the worst housing collapse in U.S. history....

#3 According to the S&P/Case-Shiller index, U.S. home prices fell 1.3 percent in October and another 1 percent in November. In fact, November represented the fourth monthly decline in a row for U.S. housing prices. Many economists are now openly using the term "double-dip" to describe what is happening to the housing market.

#5 According to RealtyTrac, a total of 3 million homes were repossessed by mortgage lenders between January 2007 and August 2010. This represents a huge amount of additional inventory that somehow must be sold.

#672 percent of the major metropolitan areas in the United States had more foreclosures in 2010 than they did in 2009.

#8 It is estimated that there are about 5 million homeowners in the United States that are at least two months behind on their mortgages, and it is being projected that over a million American families will be booted out of their homes this year alone.

#9 Deutsche Bank is projecting that 48 percent of all U.S. mortgages could have negative equity by the end of 2011.

#10 Some formerly great industrial cities are rapidly turning into ghost towns. For example, in Dayton, Ohio today 18.9 percent of all houses are now standing empty. 21.5 percent of all houses in New Orleans, Louisiana are standing vacant.

#11 According to Zillow, U.S. home prices have already fallen further during this economic downturn (26 percent) than they did during the Great Depression (25.9 percent).

#12 There are very few signs that the employment situation in the United States is going to improve any time soon. 4.2 million Americans have been unemployed for one year or longer at this point. While there has been some nominal improvement in the government unemployment numbers recently, other organizations are reporting that things are getting even worse. According to Gallup, the unemployment rate actually rose to 9.6% at the end of December. This was a significant increase from 9.3% in mid-December and 8.8% at the end of November.

But even many Americans that do have jobs are finding out that it has become very, very hard to qualify for a home loan.

In an attempt to avoid the mistakes of the past, banks and financial institutions have become very stingy with home loans. While it was certainly wise for them to make some changes, the truth is that perhaps the pendulum has swung too far at this point. The U.S. housing industry will never fully recover if they can't get their customers approved for mortgages.

Congress is talking about passing even more laws that will make it even more difficult to get home loans. Even though they give speeches about how they want to help the U.S. housing industry, the truth is that Republicans and Democrats are both backing proposals that would make home mortgages much more expensive and much more difficult to obtain as a Bloomberg article recently explained....

Government officials and lawmakers want to make the market less vulnerable to another credit crisis, and all the options lead the same general direction: Borrowers will need larger down payments than in the bubble years, have higher credit scores, and pay extra fees to cover risks and premiums for federal guarantees on government-backed mortgage bonds.

While all that may sound reasonable, the truth is that the U.S. middle class has become so cash poor that the vast majority of them cannot afford homes without the kind of mortgages that were available in the past.

Not that we should go back and repeat the mistakes of the past 20 years. It is just that nobody should expect the U.S. housing market to "bounce back" in an environment that has fundamentally changed.

The housing market is not like other financial markets. It is difficult to artificially pump it up with funny money. If the U.S. housing market is going to rebound, it is going to take lots of average American families getting qualified for loans and going out and buying houses. But they can't do this if they do not have good jobs. Today, only 47 percent of working-age Americans have a full-time job at this point. Without a jobs recovery there never will be a housing recovery.

In fact, there are all kinds of warning signs that seem to indicate that the U.S. economy could get even worse in 2011. Many economists are now openly using the word "stagflation" for the first time since the 1970s. Back in the 70s we had both high unemployment and high inflation at the same time.

Well, we have already had very high unemployment, and thanks to the relentless money printing of the Federal Reserve, it looks like we are going to have high inflation as well.

Middle class American families are going to be spending even more of their resources just trying to survive, and this is going to make it more difficult for them to purchase homes.

In fact, in recent years average Americans have been getting significantly poorer. Over the past two years, U.S. consumers have withdrawn $311 billion more from savings and investment accounts than they have put into them. That is very troubling news.

Now the price of food is soaring and the price of oil is about to cross $100 a barrel again. So what is going to happen if we have another major financial crisis and we witness another huge spike in the unemployment rate?

The Federal Reserve is trying to smooth all of our problems over with a flood of paper money, but it isn't going to work. Yes, increasing the money supply will produce some false highs on the stock market and some false economic growth statistics for a while, but the tremendous damage that will be done to the economy is just not worth it.

In any event, let us all hope that we see some really great real estate deals over the next couple of years, because in the times ahead land will be something very good to own. In fact, down the road it will be much better to own land than to have your money sitting in the bank where it will continuously decline in value.

Use your paper money wisely. It will never have more value than it does today.

In an opinion that could have unfathomable consequences in countless foreclosure cases, The Florida Bar says attorneys must notify a judge about potential fraud — including robo-signed affidavits and forged notary stamps — even if a foreclosure case is closed and the home has been sold at auction. The direction was published in an article in today's issue of The Florida Bar News as part of an outline in a new free online foreclosure class offered by The Bar. The class is in response to problems that led several major lenders to temporarily freeze foreclosures last fall.

No one knows how many cases could be affected or what judges will do when they are notified. About 1.2 million foreclosures have been filed in Florida since January 2007, according to RealtyTrac. Investigators for the Florida Attorney General's Office have found tens of thousands of forged signatures, backdated documents and other problem paperwork at four law firms, so-called "foreclosure mills" currently under investigation.

"There has never been a problem like this before or this kind of wholesale misrepresentation," said Margery Golant, a Boca Raton-based attorney who teaches a portion of the Bar's four-hour online course, which instructs lawyers to report fraud. "No one knows how this is going to turn out or what the right things to do are."

While attorneys are instructed to report fraud, they should not to do so in a public court hearing without their client's permission. Instead, the banks' attorneys should ask for a private hearing with the judge, said Cynthia Booth, an ethics attorney with the Bar. "You try to cause the least amount of harm as possible to the client," Booth said. When fraud is suspected, an attorney's duty to the court supercedes the attorney's duty to the client, Booth said. Private hearings would allow the attorney to fulfill both duties, she added.

But the thought of private hearings about widespread fraud in foreclosure cases has some lawyers bristling. Robo-signers have admitted in depositions that they signed off on hundreds of thousands of foreclosures and major lenders have already acknowledged that court documents were not properly verified, said foreclosure defense attorney Thomas Ice of Ice Legal in Royal Palm Beach "This is a very public problem and to try and address it in a private way is not going serve the court in its attempt to assure everyone about the integrity of the court system," Ice said.

St. Lucie Circuit Judge Burton Conner, another instructor, said he was not aware of the Bar's recommendation about private hearings. Conner, also a member of the Florida Supreme Court's Task Force on Residential Mortgage Foreclosures, said private hearings, called in-camera hearings, are appropriate in certain cases but very rare. "I'm not sure if that's an appropriate procedure," Conner said. "This is a civil court, and it is open to the public."

When an attorney asks for an in-camera hearing, the judge must hold a public hearing to decide if the private hearing is necessary. That means more time and more delays in processing foreclosure cases. Palm Beach County Chief Judge Peter Blanc said he's not sure how attorneys will bring problems to the court's attention in old cases or how many cases could come forward. "I would like to think if the attorneys knew, they wouldn't have been doing it in the first place," Blanc said.

As far as getting guidance from the court, Blanc said a judge has a range of options when a breach of ethics is revealed, including doing nothing to throwing out a judgment. In pending foreclosure cases, the judge could halt the proceedings while the fraud is investigated.

However, the biggest and most troublesome problem is what to do with cases that ended years ago. Can judges undo these foreclosures, and what happens in cases in which the home was sold to new owners without a clear title? As for discipline, the judges must decide what to do with fraud brought to their attention. Should they refer the cases to the Bar for further investigation or to legal authorities for prosecution? "It's going to create a huge mess. There's no other way to describe it," Conner said. "We just don't know how bad it really is. I guess you could say we're just waiting for the shoe to drop."

The U.S. consumer may be on the mend as we head further into 2011, but the same story of resurgence does not apply to many of the U.S. big-box retailers. From Wal-Mart to Sears to Target to Best Buy, if you look at what is happening in the retail space, "it looks pretty scary," says retail expert Howard Davidowitz. Wal-Mart -- the world’s largest retailer – has seen six consecutive quarters of negative same-store sales and is now looking to put the majority of its investment capital towards emerging markets. In the case of Target and Best Buy, they both recently missed major key earnings expectations. Making matters worse, Best Buy "tanked" even without the competition from the now defunct Circuit City, Davidowitz points out.

Tale of Two StoresThere is a sea change happening in retail, Davidowitz tells Aaron in the accompanying clip. Consumers are spending more now than during anytime in the last three years, but they are choosing to spend more and more online than in brick-and-mortar stores. Companies like Apple, Amazon, Netflix are doing gangbuster business while the aforementioned struggle to keep pace. Why go to the store – be it record store, book store or movie rental store – when you can buy all you need right from the comfort of your own home and have it delivered to your front door or digital media device?

The Walls Are CollapsingA coming collapse in commercial real estate has been looming for the last couple years, but Davidowitz thinks it has already begun. "I think there has [already] been a partial collapse in the commercial real estate business," he says pointing to the rising number of community bank failures. "I think retail real estate developers better start rethinking the use of their space." There are always exceptions to the rule, but his resounding advice is to stick to commodities and stay away from the retail space, at least for now.

Officially the Federal Reserve System has a dual mandate: Promote price stability and maximum employment. Now it has admitted to a third one. More on that in a moment. First, a quick review …

Two weeks ago I took on the modern central bank propaganda that wants us to believe inflation is the increase in the general level of prices of goods and services in an economy over a period of time due to positive growth.

As I wrote in that January 19 column, that’s a blatant lie — an attempt to conceal what really causes inflation.

Inflation is simply an increase in the money supply. And rising prices are but one of three possible symptoms of money supply growth. The second is speculative bubbles. And the third is an unstable economic structure.

This third symptom is probably the least understood.

Increases in the money supply seduce entrepreneurs into investments that appear profitable only because of artificially low interest rates. As soon as the central bank is forced to reverse course — usually due to rising prices — these malinvestments become obvious and have to be abandoned.

When the economic boom brought about by the central bank’s money supply increase comes to an end, a recession begins. The larger the money supply growth, the larger these malinvestments, or imbalances, that will sooner or later have to be corrected.

And now …

The Fed Has Laid the Cornerstone for Another Severe Recession

The current economic cycle is built on the Fed’s largest increase in its monetary base in history. And interest rates have been held near zero since December 2008 — indeed, a very long time.

This policy of quantitative easing and near zero interest rates is highly inflationary. Its effects will become visible with time lags. Malinvestments will blossom, and huge imbalances will indeed develop.

They will likely come when rising prices become a problem in the U.S. and Europe — like they already have in China and other emerging economies. Or when the next asset bubble becomes more obvious. Or when the next recession gets going and turns out to be even more severe than the last one.

No matter which event brings the kettle to a boil, one thing is for sure: The Fed has fertilized the ground for the next severe crisis.

What the Fed Has Not Achieved …

The current economic rebound is a very weak one. Compared to other post-WWII business cycles the current boomlet is far behind, no matter which economic indicator you use: GDP growth, retail sales, industrial production or durable goods orders. And if you look at housing market related indicators or the labor market, the picture is getting very bleak.

So with all the Fed’s money pumping and the enormous budget deficits, our politicians have bought us the weakest economic rebound ever. And with unemployment rates as high as they are now you have to conclude that the Fed — and the accompanying fiscal stimulus programs — have failed miserably.

Just look at the following chart from the U.S. Bureau of Labor Statistics. It compares the development of employment to population after the past five recessions.

As you can see, the current period is dreadfully weak. You can also see we are on the verge of hitting a new low in this important indicator of economic well being.

For Main Street the employment situation marks the difference between boom and bust. In this regard the largest fiscal and monetary stimulus program ever has fallen flat on its face.

But there is also another major negative: The government’s debt binge.

Budget deficits have gone through the roof with absolutely no end in sight! And they have the potential to wreak havoc not only with the current economic rebound but in the future as well. The longer we wait to address this problem the more hardship it will finally bring.

What the Fed Has Delivered

Fed Chairman Ben Bernanke made a rather pitiful impression during a recent CNBC interview. Steve Liesman announced he would ask a few hard-core questions. Well, to a certain degree he did.

But he did not ask how money printing could ever create wealth — or employment. He also didn’t ask how anyone, besides the market, could ever know the “right” interest rate for a whole economy. Nor did he bother to ask about the Fed’s role in pumping up the housing bubble.

But he did ask how Bernanke could claim QE2 was a success since both interest rates and commodity prices have risen considerably since he first announced it.

Bernanke’s response:

“Policies have contributed to a stronger stock market just as they did in March 2009, when we did the last iteration of this. The S&P 500 is up 20% plus and the Russell 2000, which is about small cap stocks, is up 30% plus.”

So finally it is official. The Fed has secretly adopted a third mandate by aiming directly at making stock prices rise via its quantitative easing policy. Obviously, Bernanke and his brethren haven’t learned a darn thing from two successive bubbles and their aftermaths. Now they’re actively going for the next one.

If the stakes weren’t so high, I could actually smile in the face of so much ignorance. But these wrong-headed policies are massively influencing the well-being of the whole country, your wealth and your financial future.

The Federal Reserve could debate extending its bond-buying program beyond June if U.S. economic data proves weaker than expected, Kansas City Fed President Thomas Hoenig said. Another round of bond buying "may get discussed" if the numbers look "disappointing," Hoenig told Market News International in an interview published on Tuesday.

Hoenig, an inflation hawk who vocally opposed the Fed's commitment to purchase an additional $600 billion in government bonds, reiterated his call for the central bank to reverse course, according to Market News. He called for the U.S. central bank to "normalize" policy by shrinking its balance sheet and raising interest rates.

Hoenig has argued the Fed should raise rates to 1 percent and potentially higher depending on the economy's performance. The Fed has kept interest rates near zero percent since December 2008.

The Federal Reserve has surpassed China as the leading holder of US Treasury securities even though it has yet to reach the halfway mark in its latest round of quantitative easing, according to official figures. Based on weekly data released on Thursday, the New York Fed’s holdings of Treasuries in its System Open Market Account, known as Soma, total $1,108bn, made up of bills, notes, bonds and Treasury Inflation Protected Securities, or Tips. According to the most recent US Treasury data on foreign holders of US government paper, China holds $896bn and Japan owns $877bn.

"By June [the Fed] will have accumulated some $1,600bn of Treasury securities, likely to be in the vicinity of China and Japan’s combined holdings," said Richard Gilhooly, a strategist at TD Securities. "The New York Fed surpassed China in the past month as the largest holder of US Treasury securities," he noted. The Fed is buying Treasury debt under two programmes. The largest is QE2, which began in November and is scheduled to involve $600bn of purchases by June. It is also buying $30bn of Treasuries a month as it reinvests principal payments from its large holdings of mortgage debt and debt issued by government housing agencies – a programme dubbed QE lite.

By the end of June, the Fed plans to buy $800bn in Treasury debt under both programmes. Since November, the Fed has purchased $284bn of Treasuries. The Fed has devoted 67 per cent of its QE2 purchases to Treasuries with a maturity of four-and-a-half to 10 years. That has helped pull back yields in that part of the yield curve from their highs of December. By contrast, just 5 per cent of the Fed’s buying has been for Treasury debt longer than 17 years. Last Friday, the yield on 30-year bonds briefly rose to its highest level since last April.

"The end of QE2 will be a big test as rates are likely to rise once the Fed stops buying large amounts of Treasuries," said David Ader, a strategist at CRT Capital. "We don’t know if that means a rise of 20, 30 or even 50 basis points for key yields." In total, foreign central banks hold $2,604bn of Treasuries, according to the Fed. After rising from $2,250bn at the end of last June, foreign central banks have stayed at about $2,600bn since mid-November, when the Fed began QE2. This indicates the Fed has stepped up as other central banks have scaled back their Treasuries purchases.

Before the financial crisis, the Fed held $775bn of Treasuries in Soma. That was reduced by $300bn during the first half of 2008, when the Fed sold Treasuries and focused on supporting the financial system. The first QE program, which began in 2009, saw the Fed buy $300bn of Treasuries.

When it comes to paychecks, Wall Street's law of gravity is back in full force: What goes down must come back up. In 2010, total compensation and benefits at publicly traded Wall Street banks and securities firms hit a record of $135 billion, according to an analysis by The Wall Street Journal. The total is up 5.7% from $128 billion in combined compensation and benefits by the same companies in 2009.

The increase was fueled by a revenue rebound as the financial crisis recedes in the rearview mirror. At 25 large financial firms that have reported full-year results, revenue rose to $417 billion, another all-time high, even though last year's 1% increase was just a fraction of the industry's revenue jolt from 2008 to 2009 as trading and investment banking sprang back to life. "Things are shifting back to where they were before," said J. Robert Brown, a law professor at the University of Denver who studies compensation and corporate-governance issues.

Buried in the numbers, though, are signs of how Wall Street's pay culture is bending in response to pressure from regulators and shareholders. Last year, deferred compensation made up as much as half of total pay, up from about a third previously, estimates Alan Johnson, managing director of Johnson Associates Inc., a New York pay consultant. Banks and securities firms are deferring a larger percentage of compensation than they used to, trying to counter criticism that yearly cash bonuses encourage unwise risk-taking by executives, traders and other employees aiming for a big payday.

At the same time, many Wall Street firms increased base salaries in 2010, another effort to encourage employees to focus on longer-term performance. Such moves nudged overall compensation higher, though the exact amount can't be determined from figures disclosed by the companies. Some factors may put a damper on the recent increases in compensation. Investors still reeling from losses during the crisis, an inconsistent deal-making pipeline, tightening regulations and the slow economic recovery are causing asset managers, investment banks, brokers and other financial firms to scramble for revenue growth.

Revenue is a major factor in compensation decisions, with the 25 companies paying out roughly one-third of total revenue. The percentage, known as compensation ratio, climbed to 32.5% last year from 31.1% in 2009. Average compensation per employee increased 3% to about $141,000, though the figure varies widely from company to company. Some of last year's overall pay increase came from hiring in anticipation of improved market conditions. Bank of America Corp. said its total compensation and benefits climbed 11% to $35.1 billion last year from $31.5 billion in 2009. A spokesman for the Charlotte, N.C., company noted its expansion of investment-banking and corporate-banking services in Europe.

At investment bank Greenhill & Co., a three-year hiring spree of managing directors and increased deal activity fueled a 16% jump in compensation and benefits, which reached $159.9 million in 2010, up from $138.3 million a year earlier. After stumbling last week with disappointing fourth-quarter results, Greenhill said top executives will take no cash bonuses for 2010 and get restricted shares that vest after five years. Greenhill didn't respond to a request for comment. Such deferred awards, now the norm for high-level Wall Street executives, aren't reflected in the compensation and benefits reported by companies for 2010. In addition, last year's total includes a substantial amount of compensation that was awarded in 2009 or earlier but didn't reach the employee's bank account until 2010.

The Journal's analysis includes 25 publicly traded firms with a stock-market value of at least $1 billion each. About a dozen large companies were excluded because they haven't reported 2010 results yet. The 25 companies in the analysis have a combined stock-market value of more than $750 billion, or 85% of the industry's total stock-market value.Mr. Johnson said highly paid traders suffered pay hits of 20% to 30% last year, while commercial bankers and hedge-fund managers had slight increases. Overall compensation at financial-services firms was flat, he calculates, hurt by the trading slowdown in November and December.

Wall Street firms had less flexibility than in the past to reduce or increase compensation, said Glenn Schorr, an analyst with Nomura Securities. That is because many companies increased salaries, which are hard to reverse if revenue proves to be disappointing later. As revenue growth decelerated last year, top executives and other employees who boosted the bottom line got much of the gains in pay, said the University of Denver's Mr. Brown. "Stars will be paid even more, which means other people will be paid less," he said.

Bank of America Chief Executive Brian Moynihan got a 67% bump in his total compensation for 2010, the company said Monday. Goldman Sachs Group Inc. tripled the salary of Chairman and CEO Lloyd C. Blankfein and increased his stock-based bonus 40% to $12.6 million. Pay could resurface as an issue at shareholder meetings this spring. The Dodd-Frank financial-overhaul law mandates that shareholders get a regular "say-on-pay" vote about corporate compensation plans.

This week, a group of about three dozen investment funds called for companies to support an annual advisory vote on pay, rather than a two- or three-year schedule. The frequency of the advisory vote also will come up at 2011 annual meetings, the shareholder group said.

There were many avoidable causes of the 2008-09 financial meltdown, according to last week's Financial Crisis Inquiry Commission findings. The report points the finger at several entities both public and private. It places heavy blame on the Federal Reserve for failing to properly regulate the overheated housing market and failing to identify risks in the system; it faults Wall Street for using too much leverage that ignored prudent risk management; and it places responsibility on a regulatory framework system weakened by decades of deregulation.

Noticeably absent of blame: the accountants. "The heart of the issue continues to be the same, the accounting firms," investment banker Howard Davidowitz tells Tech Ticker. "If you don't have the numbers right, how can you evaluate anything?" Not only did accounting firms fail to value assets correctly, they also were willing participants in questionable, if not illegal, schemes such as "Repo 105" -- accounting window dressing used by Lehman Brothers to misrepresent their risk exposure at the end of the quarter.

The incentive structure for accountants and rating agencies is a central flaw in the system, Davidowitz argues. It's hard to give objective analysis and advice if the company you're reviewing is also cutting the check. Until the conflict of interests inherent in the current system are dealt with, the system remains at risk, says Davidowitz. "It'll never work," he tells Aaron in the accompanying clip. "If you want to deal with systemic problems, so it won't happen again, you've got to get to the heart of our checks and balances. We didn't deal with that."

But if the clients don't pay the firms, who will? There are no easy answers to this problem.

A week has passed since President Obama's State of the Union address so we figured it was about time for a "rebuttal" from one of Tech Ticker's favorite guests: Howard Davidowitz of Davidowitz & Associates. It will come as no surprise to faithful viewers that Davidowitz remains highly critical of President Obama and deeply skeptical about prospects for the U.S. economy.

His take on the State of the Union? "It's much worse." Neither time nor improvements in the financial markets and the economy have shaken Davidowitz's dour convictions. As you'll see in the accompanying video, he has some snappy answers to my questions about what look like positive signs to the rest of us, including:

The Market: The Dow enters Tuesday's session just below multi-year highs and up dramatically since Obama took office. But this is mainly a function of the Federal Reserve trying to force investors into riskier assets, Davidowitz says, warning Bernanke's policies will eventually "destroy the dollar."

Consumer Spending: The government said consumer spending rose 0.7% in December, the latest sign of improvement. But what's really going on, Davidowitz says, is the improvement in capital markets is driving spending by wealthy Americans while the rest continue to suffer under the weight of joblessness, foreclosures and heavy debts. "All of the additional consumer spending we've seen is by 30% of the population," he says. "[The other] 70% are completely under water."

Unemployment: The unemployment rate fell from 9.8% in November to 9.4% to December, the lowest level in 19 months. But Davidowitz notes that apparent steep drop was largely a result of a steep decline in the labor pool as the "participation rate" fell to its lowest level in a quarter century. "Unemployment did not go down," he says.

To Howard, the only number that matters is the Federal deficit, which the CBO now projects will hit $1.5 trillion in the current fiscal year. "The debt is going through the roof," he says. "Maybe [Obama] thinks that's an improvement. I don't."

In his SOTU, President Obama said: "We need to take responsibility for our deficit, and reform our government" and referenced how his own deficit reduction panel said "the only way to tackle our deficit is to cut excessive spending wherever we find it - in domestic spending, defense spending, health care spending, and spending through tax breaks and loopholes."

Here again, Davidowitz is highly critical and dismissive. "I thought [the panel] did a very responsible job," he says. "[Obama] threw their entire thing in the toilet bowl because he increased the deficit by $1 trillion because he extended the Bush tax cuts. We're under water. No one can get a tax cut. "

New York Governor Andrew Cuomo proposed cutting local school aid by 7.3 percent and reducing Medicaid spending by almost $3 billion in a budget that closes a $10 billion deficit. As many as 9,800 workers may be fired under the $132.9 billion spending plan, according to documents released by Cuomo today. Aid to 700 school districts, the largest expense for the third most-populous U.S. state, would be cut by $1.5 billion to $19.4 billion in the fiscal year beginning April 1, according to the governor.

Cuomo, a 53-year old Democrat elected in November, said his budget "stops the cycle of relentless and unaffordable spending growth," as required by laws approved in past years. Looking directly at lawmakers during a speech in Albany, the capital, he urged them to pass his plan "even though the lobbyists are beating you up." New York state, he told them, is "functionally bankrupt."

The state’s outlays for Medicaid would be reduced by $2.85 billion by implementing some of the more than 1,000 suggestions already collected by a task force, Cuomo said. Future growth in the health-care program for the poor would be tied to the medical-care-costs portion of the Consumer Price Index, now about 4 percent, replacing existing rules and formulas that would have raised spending 13 percent this year, Cuomo said.

Medicaid SpendingTotal Medicaid spending, including the federal money that covers about half the program, would fall $982 million from this year, or about 2 percent, Cuomo said. He cited home health services, where administrative expenses absorb 52 cents of every dollar, as an example of how the system could become more efficient. The reduction in school aid is a reversal of the 13 percent increase called for by existing law. Including local taxes, funding for school districts would fall only 2.9 percent, the governor said.

Schools could cover loss of funds by using reserves, freezing wages of teachers and administrators, or even reducing salaries and benefits of the 279 superintendents who receive more than $200,000 per year, he said, echoing comments by New Jersey Governor Chris Christie, a Republican. New York City Mayor Michael Bloomberg said Cuomo’s plan would result in "thousands of layoffs in our schools and across city agencies," according to a statement.

Apart from the budget, Cuomo has proposed to impose discipline on schools and local governments with a state law capping their annual spending growth at the lower of 2 percent or the rate of inflation. The Senate approved that plan yesterday.

Operating FundsTo create incentives for better performance at schools, Cuomo proposed $250 million of grants to schools that improve classroom results, and $250 million for those with administrative improvements. State operating funds, which exclude federal aid and capital spending, would grow 1 percent to $88.1 billion, according to budget documents. The overall budget shrinks to $132.9 billion because of a $5.37 billion decline in federal aid. The 2.7 percent drop is the first reduction in at least 17 years.

The financial plan may reduce New York’s workforce by 11,423 positions, including firing 9,800 workers if unions don’t cooperate in reducing costs. Cuomo isn’t seeking new taxes or borrowing to close the deficit.

Fiscal WoesNew York’s budget gap is part of the $125 billion faced by U.S. states in fiscal 2012, as their tax revenue isn’t growing fast enough to make up for the loss of $53 billion of federal aid, according to a report by the Center on Budget & Policy Priorities.

To reduce costs, Cuomo proposed to slash spending at state agencies by 10 percent and merge 11 entities into four new ones. He proposed creating a task force to identify which prisons to close to match a decline in inmates. His plan would raise $455 million of additional revenue, mostly from better tax enforcement and additional funds from the state lottery, whose profit provided $2.67 billion to education last year.

Before Cuomo’s proposed changes to state spending laws, New York’s tax revenue was expected to grow 6.6 percent next year, while state spending for operations would increase 17 percent, according to budget documents. In Cuomo’s plan, tax revenue grows 6.6 percent while state spending rises only 1 percent. In the past 10 years, state spending grew by an average of 5.7 percent annually, more than twice the 2.4 percent inflation rate and faster than the 3.8 percent growth in taxes, Cuomo said.

Income TaxesLawmakers including Assembly Speaker Sheldon Silver, a Democrat from Manhattan, have questioned cutting state spending while allowing higher income-tax rates to expire Dec. 31, as scheduled. The state temporarily increased its top tax rate to 8.97 percent from 6.85 in 2009, to help close a record deficit that eventually grew to $20 billion. "We have to see what cuts are being provided as a result of that tax relief for the wealthy and whether we could afford to provide that tax relief," Silver said before the budget was announced.

Cutting state jobs and the services they provide isn’t fair in a budget that seeks "to maintain tax breaks for millionaires," said Danny Donohue, president of the Civil Service Employees Assocation, the largest union for state workers. About 127,000 of New York’s 196,000 workers are under the governor’s direct control. Senate President Dean Skelos, a Republican from Rockville Centre, said he approved of proposals for spending cuts and is opposed to any tax increases. He will continue to seek tax reductions, he said after the speech.

The state’s capital plan calls for selling $5.52 billion of bonds next year, down 7.8 percent, and ending the year with $58.1 billion of debt. New York is the third-largest borrower in the municipal bond market, after California and New York City. While Cuomo’s budget doesn’t propose selling bonds to narrow the deficit, it does call for the state to issue IOUs paying 5 percent interest to its $132.8 billion pension fund, rather than making contributions in cash. The state will save $635 million next year by reducing the cash payments to $1.67 billion.

New York City isn’t treated "equitably" and loses all of the more than $300 million of state aid it expected, while other communities are cut 2 percent under Cuomo’s budget, Bloomberg said. Nor does the governor’s plan provide relief from spending mandated by the state for pensions, buying practices or education, he said.

This is an editorial circulated by the governor's office on the night before he announced massive state budget cuts.

As attorney General, I uncovered schemes by lenders to exploit students, plots by insurance com panies to defraud patients and attempts by Wall Street to deceive homebuyers. In the past 30 days, as I have prepared the state's budget, I was shocked to learn that the state's budget process is a sham that mirrors the deceptive practices I fought to change in the private sector. The budget process is a metaphor of Albany dysfunction: special interests dominate the process with little transparency; programs continue with no accountability and the taxpayers get the exorbitant bills. The greatest challenge -- and opportunity -- in this year's difficult budget is to expose this chronic problem and reform it once and for all.

Here's how it works. This year it is widely accepted and often reported that the state has a $10 billion "deficit" (I myself have often repeated this number). What does that mean? It is the difference between state revenues and the state's growth in spending in next year's budget. The next question is: who is responsible for setting the growth in the state's budget? The answer is shockingly, no one. It is dictated by hundreds of rates and formulas that are marbleized throughout New York State laws that govern different programs -- formulas that have been built into the law over decades, without regard to fiscal realities, performance or accountability.

The formulas operate year after year, generating liabilities that when totaled define the state's budget growth. The one thing the rates do well is increase year after year. These formulas (predominantly in education and Medicaid funding) are often inserted into the law by pressure from well-connected special interests and lobbyists. When a governor takes office, in many ways the die has already been cast. Unbelievably, this year these rates and formulas in total call for a 13 percent increase in Medicaid and a 13 percent increase in education funding next year.

A 13 percent increase, in this economic climate, is wholly unrealistic. Wouldn't you like your salary or savings account to be based on a formula that gave you a 13 percent increase even though inflation was under 2 percent? The world doesn't work that way -- except in Albany.

Besides dictating numbers, this process frames the dialogue around the budget and biases the political discourse. First, the rate of increase is rarely discussed. The 13 percent increase this year is close to a state secret. I spoke with numerous experienced Albany hands who had no idea the programs increased 13 percent. In Albany speak, "deficit" means the amount needed to fund the 13 percent increase (as opposed to a normal rate of increase). For example, if one assumed these programs would increase at the rate of inflation (instead of 13 percent) the $10 billion deficit is really a $1 billion deficit.

A "cut" is then defined as anything less than a 13 percent increase. By forcing the debate to start with such a large hike, the final budget ends up spending much more than the year before -- even after the Governor attempts "cuts." For example, what is called a 7 percent cut in spending is actually a 6 percent increase over the prior year. The expression used to explain this budget process is that the rates are in "permanent law," and thus, cannot be changed. "Permanent law" is a term to suggest differentiation from the state's annual budget bills which are "temporary" as they only exist for one year.

This "permanent law" is really the way the "permanent government" of lobbyists, special interests and political friends manipulates the entire system and misleads the public in the process. This is the system that has brought New York to the brink, and it is why we are the highest "spending-and-taxing" state in the nation with programs that fail to perform for the people.

This all must end. We need fundamental reform in the budget system that allows us to recalibrate spending this year to a sustainable level and replace "the special interest protection program" of automatic, unrealistic increases. There is no such thing as "permanent" laws and they must all be reviewed and replaced or modified when necessary. The state budget should increase based on objective, fair criteria such as the rate of inflation, enrollment, the Consumer Price Index (CPI) or personal income growth. Programs should be reviewed for effectiveness and terminated if they are not working well.

Reimbursement rates should be negotiated to get the best bargain. Performance should be measured. Albany must give up its insistence on pleasing the special interests rather than serving the people. This is the real budget battle that I will wage this year. We must balance this year's budget but we must also reform the process so that the cycle finally stops. This year's budget is not merely about the numbers. It's about our values and our future.

New Jersey Governor Chris Christie said he doesn’t mind breaking promises to pensioners to close a $10.5 billion budget deficit -- even if they sue. "I have bigger issues than who sues me," said Christie, 48, a Republican and former federal prosecutor who wants to end cost-of-living increases for retirees. "Get in line."

Public workers in Colorado, South Dakota and Minnesota are already suing their states, which are among 18 that want to pare pension costs by increasing employee contributions, raising the retirement age or curbing cost-of-living increases. "We believe it’s unconstitutional," said Gary Justus, 63, a retired mathematics teacher in the Denver public schools who’s a plaintiff in the Colorado suit. "These are contracts that I and 100,000 other retirees worked for."

U.S. cities, counties and states face a $3.6 trillion gap between their pension assets and what they’ve promised retirees, according to a study by Robert Novy-Marx of the University of Rochester and Joshua Rauh at Northwestern University. States must also contend with $140 billion of budget deficits next fiscal year, according to the Center on Budget and Policy Priorities, a Washington research group.

Pressured to cut spending and not raise taxes, public officials are focusing on pensions, said Ron Snell, senior fellow at the National Conference of State Legislatures. State plans cover 24 million active and retired workers, according to the Denver-based organization, about 8 percent of the U.S. population of 309 million in 2010. Christie, saying New Jersey’s retirement benefits are "wildly out of proportion with the private sector," proposed eliminating automatic cost-of-living increases last year. The state has also stopped paying into its pensions.

Borrowing for PensionsIllinois lawmakers lowered retirement benefits for new workers last year. The state will borrow $3.7 billion this month for its fiscal 2011 contribution, the second consecutive year it sold bonds to make payments. States have exhausted "more palatable" actions such as cutting staff and expenses, Fitch Ratings said Jan. 25 in a report giving a negative outlook to the state-debt sector. They face the "most difficult" fiscal year since the U.S. recession began in December 2007, Fitch said, as federal stimulus payments end.

The strain of funding pensions intensified as securities markets fell during the 18-month economic contraction, the longest since the 43-month slump of the Great Depression, according to the National Bureau of Economic Research. Asset values fell to about 76 percent of obligations in 2009 from about 82 percent in fiscal 2008, according to data compiled by Bloomberg.

Least-Sound SystemIllinois has the least-sound system, with a funded ratio of about 51 percent, followed by Oklahoma and Kentucky, according to the Bloomberg data. Missouri, Oregon and Arkansas are in the middle with about 80 percent, a ratio considered adequate by actuaries. The "rapid" growth of unfunded obligations prompted Moody’s Investors Service to issue a combined measurement of states’ debt and pension liabilities for the first time on Jan. 27 so investors can compare them with companies. Pressure to fund retirements will continue to have a "negative impact" on state credit ratings, Moody’s said.

Former U.S. House Speaker Newt Gingrich, a Republican and potential 2012 presidential candidate, has proposed allowing states to restructure debts in bankruptcy-like proceedings giving them more leverage in bargaining with employees over wages and pensions. More than 20 states considered changes to pension plans last year, according to the National Conference of State Legislatures.

‘Serious’ Proposals"Too many proposals to count" have been introduced so far in 2011, said Snell, the National Conference of State Legislatures’ pension expert. Lawmakers in at least a dozen states, including California, New York and Ohio, have "serious" proposals, he said. Florida Republican Governor Rick Scott said yesterday that state employees should contribute to their pensions and New Jersey Senate President Stephen Sweeney, a Democrat, said on Jan. 31 that he’ll introduce legislation that goes beyond Governor Christie’s in trimming benefits.

"We’re looking at a year of trying to make widespread and significant changes," said Snell. "Some of these can provide real savings, if they can be done." Some states may switch from plans that provide specific benefits to so-called defined-contribution systems, which are like 401(k) plans used at companies. Three states -- Alaska, Nebraska and Michigan -- have required them, and Utah will beginning July 1. Six make them optional.

Short of FundsNew Jersey’s Christie said in an interview that taking away cost-of-living increases for retirees would break a promise. It’s necessary, he said, because the state’s pension system is $46 billion short of funds. "There is no alternative," he said at Bloomberg’s New York headquarters on Jan. 25. Previous officials "knew when they promised it they couldn’t afford it."

Christie’s statements don’t sit well with Steve Baker, a spokesman for the New Jersey Education Association, whose 200,000 members are covered by the state pension. He said the state failed to make annual contributions to its pension funds in 13 of the past 17 years, including two under the current governor. "All his tough-guy, let-them-sue-me rhetoric fails to solve the problem," said Baker. "Until the governor wants to sit down with all the parties and come up with a solution that solves the problem, the governor isn’t doing his job." The lawsuits filed in Colorado, Minnesota and South Dakota challenge changes in cost-of-living adjustments, according to court documents.

Purchasing PowerColorado eliminated annual increases of at least 3 percent, according to court records. Justus, the retired Denver teacher, said losing the adjustments would erode his purchasing power by 35 percent over 30 years. He estimates it would cost all Colorado workers in the plan $40 billion. "What allows the state to abrogate that contract?" said Justus, who lives in Evergreen, Colorado. "If it’s allowed to stand, it will set an incredible precedent for the state to cut benefits again." Colorado’s cuts, which included higher participant contributions and an increased retirement age, were in the public interest after investment losses in 2008, said Gregory Smith, general counsel for the Public Employees’ Retirement Association, known as PERA.

Immediate Reduction"The legislation was passed to keep the fund from running out of money," Smith said in via telephone. "We had to reduce the payouts by the fund immediately." Joe Kafka, a spokesman for South Dakota Governor Mike Rounds, declined to comment on the lawsuit. Attorney General Marty Jackley’s spokeswoman, Sara Rabern, declined to comment. Minnesota Governor Mark Dayton’s spokesman, Jeremy Drucker, didn’t return a phone call and e-mail seeking comment.

None of the three lawsuits has been ruled on and there is little precedent for some of the proposed pension changes, said Amy Monahan, a professor at the University of Minnesota Law School in Minneapolis, who studies the legality of changing pension benefits. "A lot of states are flying blind because there aren’t a lot of cases," said Monahan. "There is so much legal uncertainty about what is permitted." California and Illinois have constitutions that make it difficult to change benefits, said Monahan. Others, such as Maine and Connecticut, have fewer legal constraints, she said.

Property RightCourts have found that pensions are a property right, said Stephen Pincus, an attorney with Stember Feinstein Doyle & Payne in Pittsburgh, who brought the three lawsuits. The key to whether existing benefits can be cut will be language that determines if a pension is a legal contract and when the agreement becomes property, he said. A state may be able to change the law if there is a "real substantial likelihood the government cutting is on the edge of financial ruin," according to Pincus.

"The state has the power to protect its citizens," said Monahan. "If your fiscal situation looks dire, you could do it to stay solvent." States shouldn’t be allowed to make pension cuts a priority over other liabilities, said Pincus. "It’s our position that a state can’t pick and choose obligations it doesn’t want to pay," said Pincus. "Are you going to creditors and saying you can’t pay your 30-year bonds?"

The International Monetary Fund (IMF) has warned that "dangerous" imbalances have emerged that threaten to derail global recovery and stoke tensions that may ultimately set off civil wars in deeply unequal countries. Dominique Strauss-Kahn, the IMF's chief, said the economic rebound across the world is built on unstable foundations, with many rich nations still strapped in job slumps while the rising powers of China, India and Brazil already facing the threat of overheating.

"It is not the recovery we wanted. It is a recovery beset by tensions and strain, which could even sow the seeds of the next crisis," he said. "Global unemployment remains at record highs, with widening income inequality adding to social strains," he said, citing turmoil in North Africa as a prelude to what may happen as 400m youths join the workforce over the next decade. "We could see rising social and political instability within nations – even war," he said.

The IMF has published a paper entitled Inequality, Leverage and Crisis arguing that the extreme gap between rich and poor – with echoes of the US in the late 1920s – was an underlying cause of the Great Recession from 2008-2009. The paper, by the Fund's modelling unit, warned of "disastrous consequences" for the world economy unless workers regain their "bargaining power" against rentiers. It suggests radical changes to the tax system and debt relief for workers.

Mr Strauss-Kahn said the toxic global imbalances that caused the financial crisis are re-emerging, naming China and Germany as the two arch-sinners that rely on export surpluses to power growth at the expense of the US and other deficit countries. "The most important question is to deal with the recurrent problem of some countries' large external surpluses," he said, warning that failure to curb excesses will lead to global clashes and rising protectionism in trade and finance.

In a veiled warning to China and other countries holding down their currencies for commercial advantage, the IMF chief said "exchange-rate adjustment should not be resisted". Nor should capital controls be imposed to stop the inflow of funds. The comments appear to align the IMF behind Washington in the simmering dispute over the declining dollar. China and Brazil have accused the US of covert currency warfare through quantitative easing, but the claim is slippery since the US has a huge structural trade deficit.

Mr Strauss-Kahn also hinted that parts of Asia are exceeding the safe speed limit for growth and needed to "tighten" further before inflation gets out of control. "There are risks of overheating, and even a hard landing," he said.

Moody's Investors Service downgraded the ratings for five Egyptian banks while Standard & Poor's lowered its ratings for two banks, in the latest volley of bad news for the economy of a nation mired in violent protests. Moody's cuts come just two days after it lowered Egypt's sovereign rating, citing the unrest that has gripped the Arab world's most populous nation for more than a week. It warned that the five banks' ratings remain on review for possible additional downgrade. Analysts have grown increasingly concerned of a spillover effect, worried that the chaos will begin to affect other countries in the oil-rich Mideast.

Both international ratings agencies cited the political turmoil in Egypt and its potential impact on the country's economy, raising concerns that included a possible liquidity squeeze and government's ability to support the banking sector. Moody's said the downgrade of the local currency deposit ratings of the banks was "mainly driven by our reassessment of the country's capacity to support its banking system, following the lowering of the government's ratings."

It said it was concerned that the current political uncertainty, if not resolved, "could negatively impact foreign direct investment flows into the country and disrupt economic activity, thereby weakening the performance of the main economic sectors." Business has been sharply disrupted in Egypt as the protests have dragged on. Tourists are fleeing in droves, many factories have suspended production and the national carrier EgyptAir is flying only about 25 percent of its scheduled flights.

In addition, banks have been closed since Jan. 28, as has the country's stock exchange which saw its benchmark index fall about 17 percent in the span of two days before the weekend. It remains unclear when the exchange or the banks will reopen. The five banks affected by Moody's cuts were the National Bank of Egypt, Banque Misr, Banque du Caire, Commercial International Bank and Bank of Alexandria. Moody's cut NBE, Banque Misr, Commercial International Bank and Bank of Alexandria's local deposit ratings two notches, to Ba1/NP, while Banque du Caire's LDR was lowered one notch to Ba1/NP. The cuts are all to levels well below prime.

Meanwhile, S&P, which had yesterday lowered Egypt's long-term foreign currency sovereign rating to BB from BB+, cut the ratings for the National Bank of Egypt and the Commercial International Bank to BB, from BB+. It said its cuts reflected the worries about the ongoing political instability and the risk the unrest would affect liquidity in the banking sector. In addition, there were worries that the weakening of Egypt's creditworthiness could affect the government's ability to provide support, if needed, for government-related entities such as NBE. "The ratings on NBE ... reflect our opinion of the bank's poor asset quality, very weak capitalization, and risky operating environment," S&P said.

Risk analysts and intelligence agencies fear that Egypt's uprising may set off escalating protests in the tense Shia region of Saudi Arabia, home to the world's richest oilfields. "Yemen, Sudan, Jordan and Syria all look vulnerable. However, the greatest risk in terms of both probability and severity is in Saudi Arabia," said a report by risk consultants Exclusive Analysis.

While markets have focused on possible disruption to the Suez Canal, conduit for 8pc of global shipping, it is unlikely that Egyptian leaders of any stripe would cut off an income stream worth $5bn (£3.1bn) a year to the Egyptian state. "I don't think the Egyptians will ever dare to touch it," said Opec chief Abdalla El-Badri, adding that the separate Suez oil pipeline is "very well protected". The canal was blockaded after the Six Days War in 1967.

There has been less focus on the risk of instability spreading to Saudi Arabia's Eastern Province, headquarters of the Saudi oil giant Aramco. The region boasts the vast Safaniya, Shaybah and Ghawar oilfields. "This is potentially far more dangerous," said Faysal Itani, Mid-East strategist at Exclusive. "The Shia are 10pc of the Saudi population. They are deeply aggrieved and marginalised, and sit on top of the kingdom's oil reserves. There have been frequent confrontations and street fights with the security forces that are very rarely reported in the media," he said.

The Saudi Shia last rose up in mass civil disobedience in the "Intifada" of 1979, inspired by the Khomeini revolution in Iran. Clashes led to 21 deaths. Mr Itani said it is unclear whether the Saudi military could cope with a serious outbreak of protest in the province. Saudi King Abdullah is clearly alarmed by fast-moving events in Egypt and the Arab world. In a statement published by the Saudi press agency he said agitators had "infiltrated Egypt to destabilise its security and incite malicious sedition".

The accusations seem aimed at Iran's Shia regime, which has openly endorsed the "rightful demands" of the protest movement. There is deep concern in Sunni Arab countries that Iran is attempting to create a "Shia Crescent" through Iraq, Bahrain and into the Gulf areas of Saudi Arabia, hoping to become the hegemonic force in global oil supply.

Goldman Sachs said the Mid-East holds 61pc of the world's proven oil reserves – and 36pc of current supply – which may compel global leaders to make "concentrated efforts" to stabilise the region. The bank said high levels of affluence should shield Saudi Arabia and the Gulf's oil-rich states from "political contagion". However, a third of Saudi Arabia's 25m residents are ill-assimilated foreigners and the country faces a "youth bulge", with unemployment at 42pc among those aged 20 to 24.

Nima Khorrami Assl, a Gulf expert at the Transnational Crisis Project, said Shi'ites have been "stigmatised as a result of excessive paranoia since Iran's Islamic Revolution" and face systemic barriers in education and jobs. "Should the Gulf states do nothing or attempt to preserve the status quo, social unrest becomes inevitable. The current situation is inherently unstable," he told Foreign Policy Journal. Exclusive Analysis said Egypt's revolt had gone beyond the point of no return as protesters plan a 1m stong rally on Tuesday, with president Hosni Mubarak likely to be ousted within 30 days.

John Cochrane, the group's global risk strategist, said the regime has so far refrained from ordering the army to crush protesters knowing that many officers will refuse to obey. "If asked to use lethal force, it is questionable whether the army's cohesion will hold together," he said. The Muslim Brotherhood, the best-organised of the diffuse protest movement, has reached out to the military, praising its "long and honourable history", but it has also begun to set up its own populist militias to protect the streets.

A future government – with the Brotherhood pulling some strings – is expected to renationalise parts of industry, shifting away from "free-market" policies used to weaken the labour unions and steer contracts to an incestuous elite. Ezz Steel and other parts of the business empire of Ahmed Ezz may be seized, as well as infrastructure assets linked to corrupt ministers.

The Brotherhood's "old guard" has so far controlled its hotheads but the organisation is close to Hamas in Gaza. Israel may soon find that it can no longer count on a secure southern border, even if Egypt's peace treaty remains in name. The outbreak of Arab populism vindicates claims by US neo-conservatives that the region is ripe for change, but this is not what Washington had in mind. "US interests are the first casualty," said Mr Itani.

Fairly or unfairly, America is tarred with the Mubarak brush. Cairo may switch allegiance to the rising powers of Turkey, India, and above all, China.

The protests in Egypt have prompted renewed questions about the U.S.’s aid to the country—an issue that the U.S. government has also pledged to reconsider [1]. We’ve taken a step back and tried to answer some basic questions, such as how as much the U.S. has given, who has benefitted, and who gets to decide how its all spent.

How much does the U.S. spend on Egypt? Egypt gets the most U.S. foreign aid of any country except for Israel. (This doesn't include [2] the money spent on the Iraq and Afghanistan wars.) The amount varies each year and there are many different funding streams, but U.S. foreign assistance to Egypt has averaged just over $2 billion every year since 1979, when Egypt struck a peace treaty with Israel [3] following the Camp David Peace Accords, according to a Congressional Research Service report from 2009.

That average includes both military and economic assistance, though the latter has been in decline since 1998 [4], according to CRS.

What about military aid—how much is it, and what does it buy? According to the State Department, U.S. military aid to Egypt totals over $1.3 billion annually [5] in a stream of funding known as Foreign Military Financing.

U.S. officials have long argued that the funding promotes strong ties between the two countries’ militaries, which in turn has all sorts of benefits. For example, U.S. Navy warships get “expedited processing” through the Suez Canal.

President Mubarak and military leaders view our military assistance program as the cornerstone of our mil-mil relationship and consider the USD 1.3 billion in annual FMF as "untouchable compensation" for making and maintaining peace with Israel. The tangible benefits to our mil-mil relationship are clear: Egypt remains at peace with Israel, and the U.S. military enjoys priority access to the Suez Canal and Egyptian airspace.

The military funding also enables Egypt to purchase U.S.-manufactured military goods and services, a 2006 report [7] from the Government Accountability Office explained [PDF]. The report criticized both the State Department and the Defense Department for failing to measure how the funding actually contributes to U.S. goals.

Does this aid require Egypt to meet any specific conditions regarding human rights?No. Defense Secretary Gates stated in 2009 that foreign military financing “should be without conditions [8].”

Gates prefaced that comment by saying that the Obama administration, like other U.S. administrations, is “always supportive of human rights.”

The administration of former president George W. Bush had threatened to link military assistance to Egypt’s human rights progress [9], but it didn’t follow through. When exiled Egyptian dissident, Saad Eddin Ibrahim, called on the U.S. government to attach conditions to aid to Egypt, U.S. officials dismissed the idea as unrealistic [10].

Who benefits from the military aid?Obviously the aid benefits Egypt’s military and whatever government it supports, which has so far been Mubarak’s. Foreign military financing is a great deal for Egypt—it gets billions in no-strings-attached funding to modernize its armed forces and replace old Soviet weapons with advanced U.S. weaponry and military equipment.

According to the State Department, that equipment has included [5] fighter jets, tanks, armored personnel carriers, Apache helicopters, anti-aircraft missile batteries and aerial surveillance aircraft.

Egypt can purchase this equipment either through the U.S. military or directly from U.S. defense contractors, and it can do so on credit. In 2006, the GAO noted that Egypt had entered some defense contracts in advance of—and in excess of—its military assistance appropriations. Some of those payments wouldn’t be due in full until 2011, the GAO said.

The other group that benefits from this aid arrangement is U.S. defense contractors [11]. As we reported with Sunlight Foundation, contractors including BAE Systems, General Dynamics, General Electric, Raytheon and Lockheed Martin have all done business [12] with the Egyptian government through relationships facilitated by high-powered DC lobbyists.

What about economic aid?U.S. economic aid to Egypt has declined over the years, but is generally in the hundreds of millions annually.

Some of this aid also comes back to benefit the U.S. through programs such as the Commodity Import Program [5]. Under that program, the U.S. gives Egypt millions in economic aid to import U.S. goods. The State Department, on its website, describes it as “one of the largest and most popular USAID programs.”

Others were not as successful. A 2006 inspector general’s audit of a 4-year, $57-million project to increase jobs and rural household incomes found that the U.S. investment “has not increased the number of jobs as planned [13]” among participants [PDF]. A 2009 audit of a $151 million project to modernize Egypt’s financial sector found that while the country’s real estate finance market experienced significant growth throughout the project’s duration, USAID’s efforts were “not clearly measurable [14]” [PDF] and the growth could be due to market forces or the Egyptian government's actions.

Critics of the Obama administration’s economic aid to Egypt have noted that in 2007, for instance, such aid only amounted to $6 per capita [15], compared with the $40.80 per capita spent on Jordan that same year. Ahmad El-Naggar, economic researcher at Al-Ahram Center for Political and Strategic Studies, criticized the U.S. in 2009 for focusing on “programs valued for strict ideological reasons,” and not on the country’s growing poverty and unemployment rate—two issues fueling the current protests.

What about funding for democracy promotion and civil society? Funding for programs that promote democracy and good governance through direct funding to NGOs in Egypt averaged about $24 million from fiscal year 1999 to 2009. But these, too, had “limited impact,” due to “a lack of Egyptian government cooperation [16],” according to an October 2009 inspector general audit [PDF]:

The Government of Egypt has resisted USAID/Egypt’s democracy and governance program and has suspended the activities of many U.S. NGOs because Egyptian officials thought these organizations were too aggressive.

Recently released cables from WikiLeaks show that officials within the Egyptian government have asked that USAID stop financing organizations [17] that were “not properly registered as NGOs” with the Egyptian government. AFP reports on a 2007 embassy cable that describes President Mubarak as “deeply skeptical of the US role in democracy promotion.”

Per the Egyptian government’s complaints, the U.S. now limits its funding to NGOs registered with the government, therefore excluding most human rights groups [18], Huffington Post reported. Such funding has also declined sharply under the Obama administration.

The ongoing demonstrations in Egypt are as much, if not more, about the mass deterioration of economic conditions and the harsh result of years of financial deregulation, than the political ideology that some of the media seems more focused on. Plus, as Mark Engler cross-posted on Alternet and Dissent yesterday, the notion that the protests in Cairo are 'spontaneous uprisings' misses the mark. As he eloquently wrote, "there are extraordinary moments when public demonstrations take on a mass character and people who would otherwise not have dreamed of taking part in an uprising rush onto the streets. But these protests are typically built upon years of organizing and preparation on the part of social movements."

That got me thinking about what else has been building up in Egypt under Mubarak's 29-year as President, but more specifically over the past decade, and in particular the years leading up to the world economic crisis catalyzed by the US banking system - and that would be, extreme financial deregulation and the increased influx of foreign banks, capital, and "investment" which tends to be a euphemism for "speculation" when it belies international funds looking for hot prospects, no matter what the costs to the local population.

According to the CIA's World Fact-book depiction of Egypt's economy, "Cairo from 2004 to 2008 aggressively pursued economic reforms to attract foreign investment and facilitate GDP growth." And, while that was happening, "Despite the relatively high levels of economic growth over the past few years, living conditions for the average Egyptian remain poor."

Unemployment in Egypt is hovering just below the 10% mark, like in the US, though similarly, this figure grossly underestimates underemployment, quality of employment, prospects for employment, and the growing youth population with a dismal job future. Nearly 20% of the country live below the poverty line (compared to 14% and growing in the US) and 10% of the population controls 28% of household income (compared to 30% in the US). But, these figures, as in the US, have been accelerating in ways that undermine financial security of the majority of the population, and have been doing so for more than have a decade.

Around 2005, Egypt decided to transform its financial system in order to increase its appeal as a magnet for foreign investment, notably banks and real estate speculators. Egypt reduced cumbersome bureaucracy and regulations around foreign property investment through decree (number 583.) International luxury property firms depicted the country as a mecca (of the tax-haven variety) for property speculation, a country offering no capital gains taxes on real estate transactions, no stamp duty, and no inheritance tax.

But, Egypt's more devastating economic transformation centered around its decision to aggressively sell off its national banks as a matter of foreign and financial policy between 2005 and early 2008 (around the time that US banks were stoking a global sub-prime and other forms-of-debt and leverage oriented crisis). Having opened its real estate to foreign investment and private equity speculation, the next step in the deregulation of the country's banks was spurring international bank takeovers complete with new bank openings, where international banks could begin plowing Egyptians for fees. Citigroup, for example, launched the first Cards reward program in 2005, followed by other banks.

According to an article in Executive Magazine in early 2007, which touted the competitive bidding, acquistion and rebranding of Egyptian banks by foreign banks and growth of foreign M&A action, the biggest bank deal of 2006 was the sale of one of the four largest state-run banks, Bank of Alexandria, to Italian bank, Gruppo Sanpaolo IMI. This, a much larger deal than the 70% acquisition by Greek's Piraeus Bank of the Egyptian Commercial Bank in 2005, one of the first deals to be blessed by the Central Bank of Egypt and the Ministry of Investment that unleashed the sale of Egypt's banking system to the highest international bidders.

The greater the pace of foreign bank influx and take-overs to 'modernize' Egypt's banking system, inevitably the more short-term, "hot" money poured into Egypt. Pieces of Egypt, or its companies, continued to be purchased by foreign conglomerates, trickling off when the global financial crisis brewed full force in 2008, though not before Goldman Sachs Strategic Investments Limited in the UK bought a $70 million chunk of Palm Hills Development SAE, a high-end real estate developer, in March, 2008.

When a country, among other shortcomings, relinquishes its financial system and its population's well-being to the pursuit of 'good deals', there is going to be substantial fallout. The citizens protesting in the streets of Greece, England, Tunisia, Egypt and anywhere else, may be revolting on a national basis against individual leaderships that have shafted them, but they have a common bond; they are revolting against a world besotted with benefiting the powerful and the deal-makers at the expense of ordinary people.

Among the many aspects of the U.S.-Egypt relationship, few have been as controversial as the CIA’s extraordinary rendition program, where the agency frequently handed over suspected terrorists to foreign governments with histories of torture and illegal detention.

According to Human Rights Watch, Egypt welcomed more CIA detainees than any other country from the 1990s through 2005. And while renditions happen only with the assurance that a foreign partner will not torture the prisoner, as one CIA officer once told Congress, the assurances “weren’t worth a bucket of warm spit.” (Want to know more about rendition? Here’s a good backgrounder.)

In the case of Egypt, the assurances were given by Omar Suleiman, former head of the country’s intelligence service, and the man President Hosni Mubarak picked as his vice president a few days ago.

Perhaps the most notorious case is that of Ibn al-Shaikh al-Libi, a Libyan national captured by Pakistani authorities in the months after the September 11, 2001 attacks. According to a 2006 Senate Intelligence Committee report, [PDF] al-Libi was turned over to American authorities and eventually sent to Egypt, where his fabricated testimony, given under torture, became a key piece of “evidence” falsely linking al-Qaeda to Saddam Hussein.

According to the Senate report, al-Libi said he began to feed his captors false intelligence once American interrogators threatened to send him to a foreign government. He started talking, he said, but was sent to Egypt anyway. He later told the CIA that his Egyptian captors placed him in a box less than 2 feet square for 17 hours.

Then, “when he was let out of the box, al-Libi claims that he was given a last opportunity to ‘tell the truth.’ ” He was struck down, he said, and finally “was punched for 15 minutes.” In another episode, he says he was beaten in a way that wouldn’t leave any marks.

As The New Yorker’s Jane Mayer and others have detailed, the “intelligence” he provided made its way into the 2003 speech that Secretary of State Colin Powell gave to the United Nations, laying out the evidence to justify war with Iraq. Years later, after no weapons of mass destruction were found, al-Libi recanted.

“When the F.B.I. later asked him why he had lied, he blamed the brutality of the Egyptian intelligence service,” Mayer writes. “Libi explained, ‘They were killing me,’ and that, ‘I had to tell them something.’ ”

Another famous case is that of Osama Mustafa Hassan Nasr, an Egyptian cleric who disappeared for a year after he was snatched off the streets of Milan in 2003 and taken to Egypt. Known in the agency as “The Italian Job,” the operation was exposed when Italian prosecutors were able to reconstruct the kidnapping after Nasr was released. In 2009, an Italian court convicted 23 Americans in absentia for the kidnapping.

A 2005 report from Human Rights Watch documented 63 cases of people being rendered to and from Egypt, though the report also estimated that the total number of cases was much higher, with as many as 200 people sent away since 2001. The United States was involved in most but not all of those cases, according to the report.

Muhammad al-Zawahiri, the brother of high-ranking al-Qaeda member Ayman, was reportedly kidnapped in the United Arab Emirates in 1999. He was presumed dead for years until the Arab press picked up on his detention.

“For more than five years, the Egyptian government refused to answer a single question about al-Zawahiri’s whereabouts, and allowed his family to believe that he had died rather than disclose his continued incarceration,” the HRW report said. His brother Hussain was also abducted in 1999, reportedly with help of the CIA in Malaysia, according to the report.

Days after taking office, President Obama signed an executive order restricting renditions but also keeping them as an option. "Obviously you need to preserve some tools – you still have to go after the bad guys," an administration official told the Los Angeles Times.

In September, a federal appeals court ruled that detainees cannot sue the CIA over allegations of torture at the hands of foreign governments.

An unprecedented €40bn of deposits was withdrawn from Irish banks in December, dwarfing the flight in deposits earlier in 2010. December's massive deposit exodus means a total of almost €110bn has been taken out of Ireland's 15 retail banks since the start of 2010. The figures are revealed in monthly reports from the Central Bank, which show a marginal fall in lending in the year to December, as well as a €2.7bn fall in reliance on cheap cash from the European Central Bank (ECB).

The most dramatic element of the latest data, however, is the sharp acceleration in the fight of deposits from the so-called 'domestic group' of banks. In November, the group of 15 banks lost €26.7bn and by December the monthly rate of deposit loss soared to €40.3bn. Depositors from outside Ireland are withdrawing their cash at the fastest rate, pulling out more than €35bn in December and €91bn in the full-year.

Non-Irish deposits include cash from multinational companies doing business here and cash held by investment funds and pension funds. The depositors have little motivation to keep their funds in Ireland, and many have been spooked into withdrawing money as the credit ratings of Irish banks deteriorated.

The impact has been most sharp for deposits from outside the euro area, which fell by almost €34bn in December and €81bn in the full year. Deposits from the euro area, which held up quite well until September, dipped €1.4bn in December bringing their total fall for 2010 to just over €10bn. The latest data also shows Irish companies and individuals are continuing to pull their funds out of our retail banks.

In December, almost €5bn of deposits was withdrawn by Irish residents, bringing the full-year tally for Irish withdrawals to €18.5bn. The private sector, including non-financial companies and ordinary bank customers, took out €3.3bn in December and €19.1bn in the full-year.

LendingDeposits from general government, including semi-states, remained largely stable, as did deposits from financial institutions. Banks have dealt with collapsing deposits by increasing their reliance on funds from the ECB, and emergency cash from Ireland's Central Bank. Yesterday's data confirms the ECB's support to the domestic group fell by €2.7bn to €94bn in December. The year-end position is still well ahead of ECB advances at the start of 2010, when supports were €58.5bn. Emergency support from the Central Bank of Ireland totalled about €49bn, up from €43bn in November.

Yesterday's figures also show another contraction in banks' lending, as loans to households fell by 5.2pc and loans to non-financial companies fell 1.2pc in the year to December. "There is very little good news in these latest banking figures," said Bloxhams' chief economist Alan McQuaid. "Until the banking sector crisis is fully resolved and things improve on the labour market front then the supply/demand for credit will remain subdued."

Ireland suffered a further downgrade on Wednesday (2 February), with the country's beleaguered economy set to dominate the political agenda ahead of national elections in three weeks time. Credit ratings agency Standard & Poor's downgraded Irish sovereign debt for the third time in six months, cutting its rating by one notch from A to A-minus. The firm blamed its decision on Ireland's crippled banking sector, warning that the Irish government may have to inject even more money into the nation's banks if the wider economy weakens further.

Plans to restore growth and the terms of Ireland's recent €85 billion EU-IMF bail-out look set to dominate the political debate ahead of legislative elections on 25 February. Prime Minister Brian Cowen of the populist Fianna Fail party finally succumbed to months of pressure on Tuesday, calling for the dissolution of parliament and setting the election date. The opposition centre-right Fine Gael party topped an opinion poll on Wednesday at 30 percent, with the centre-left Labour party coming in second place at 24 percent. The two are widely forecast to form a coalition after the elections. Fianna Fail have the support of 16 percent, as does Sinn Fein, largely on the back of its outright rejection of the EU-IMF austerity package.

Fine Gael leader Enda Kenny was in Brussels last Friday to speak to European Commission President Jose Manuel Barroso. The Irish politician expressed his desire to see a reduction in the roughly six percent interest rate currently being charged on the country's international aid package. Germany has been the driving member state behind the setting of high interest rates, arguing that lower borrowing costs could reduce incentives for governments to put their economies in order.

Chancellor Angela Merkel appears to have softened her position in recent weeks however, although German officials insist any interest rate reduction must be part of a wider package of economic reforms. France and Germany are expected to present EU leaders meeting in Brussels this Friday with their plans for closer 'economic government' in the eurozone, although subsequent negotiations are likely to last several weeks. A final deal could be struck at an EU summit on 24-25 March, with rumours of an extraordinary meeting of EU leaders prior to that date.

Plans to boost economic growth and ensure budgetary discipline are among the topics expected in the Franco-German plan. Proposals for constitutional 'debt-brakes' in the different member states, as well as widespread pension reform may also be included.

To understand how far ordinary Chinese have been priced out of their country's property market, you need to look not upwards at the Beijing's shimmering high-rise skyline, but down, far below the bustling streets where nearly 20m people live and work.

There, in the city's vast network of unused air defence bunkers, as many as a million people live in small, windowless rooms that rent for £30 to £50 a month, which is as much as many of the city's army of migrant labourers can afford. In a Beijing suburb, beneath one of the thousands of faceless residential tower blocks that have carpeted the city's peripheries in a decade-long building frenzy, one of Beijing's "bomb shelter hoteliers", as they are known, agrees to show us his wares.

Passing under a green sign proclaiming "Air Defence Basement", Mr Zhao leads us down two flights of stairs to the network of corridors and rooms that were designed to offer sanctuary in the event of war or disaster. "We have two sizes of room," he says, stepping past heaps of clutter belonging to residents, most of whom work in the nearby cloth wholesale market. "The small ones [6ft by 9ft] are 300 yuan [£30] the big ones [15ft by 6ft] are 500 yuan."

Beijing is estimated to have 30 square miles of tunnels and basements, some constructed after the Sino-Soviet split of 1969, when Mao's China feared a Soviet missile strike, and many more constructed since to act as more modern emergency refuges.

The fact Mr Zhao can easily rent out 150 such rooms, with the connivance of the city's Civil Defence Bureau with whom he has signed a five-year contract and invested nearly £150,000, is testament to China's massive unfulfilled demand for affordable housing. "Some 80pc of our tenants are girls working in the wholesale market and the rest are peddlers selling vegetables or running sidewalk snack booths," he adds. "There are dozens of similar air defence basement projects in residential communities. In this area, they say 100,000 live underground."

Checking out the price of property above ground it is not difficult to see why. To buy a small flat (860 sq ft) in the tower block above – a typically grim, grey concrete affair – currently costs more than £200,000. In a city where the average monthly salary is 4,000 yuan, the average person would take 50 years to buy such an apartment, assuming they saved every penny they earned.

At the market, Xiao Wang, a sales girl who is one of the basement dwellers, says she lives in a small basement room with a friend. They have no kitchen and only the use of a stinking public toilet upstairs. "I can earn 4,000 yuan on a good month with commissions," she says, "but sometimes it is only 2,000. I could maybe afford something a little better, but I need to save money so this is how I have to live."

Such vast discrepancies between house prices and earnings are creating social and economic difficulties for China's government – the discontented poor can't find a decent place to live while the rich look to store their wealth in a speculative, bubble-prone property market. Not for nothing did Li Daokui, an adviser to China's central bank, tell the World Economic Forum in Davos last week that rising property prices were the "biggest danger" to China's economy. With inflation and wage pressures also mounting, a growing number of investors are starting to question the long-term sustainability of China's investment-heavy growth model. A survey of global investors by Bloomberg last week found that 45pc of them expect a financial crisis in China within the next five years, with another 40pc anticipating a crisis after 2016.

China's government has given notice that it understands the risks of a property bubble, throwing another bucket of cold water on to the market last week, announcing new restrictions including minimum deposits on second homes of 60pc and a standing property tax in Shanghai and Chongqing. However, many analysts remain sceptical that the curbs, allied to further interest rate rises expected this quarter, will do much more than stabilise prices which rose by 26pc in Shanghai and 12pc in Beijing last year despite an earlier round of cooling measures.

Goldman Sachs said it felt the impact of the curbs would be "short-lived" while Citigroup said the measures, while "harsh", would not cause a sharp pullback in property prices, but at best would stop prices going up much further this year. Those with a bearish outlook, such as Michael Pettis, professor of finance at Beijing's Peking University, question whether China's leaders will dare hit the brakes hard enough when so much of China's economy relies on property investment to hit its politically sacrosanct annual growth targets.

Even last year's soaring retail figures – sales of furniture rose by 37.2pc, household appliances by 27.7pc – appear to flatter the strength of China's real economy, he argues in a note, since they are "as much an indication of soaring real estate investment as of rising consumption". Others point to the low level of mortgages on Chinese property and the underlying demand for property in a country that will urbanise 200m people in the next 20 years and argue that the bull market has a long way to run yet.

But for Beijing's bunker residents who will never be able to afford a house, no matter how far prices fall, such considerations are superfluous, so long as China's government does more to manage their rising discontent. This year, in a sign that it is getting serious about low-cost housing after years of paying lip-service, Beijing's municipal government announced it was putting 200,000 new low-cost rental homes on the market, compared with 10,000 last year.

"We don't ask for much," said a roadside vegetable seller who also lives in a nearby basement shelter, "but the government must give us somewhere to live, because without us labourers what is going to support the Beijing economy?"

Ivory Coast reneged on $2.3 billion of Eurobonds, becoming the first nation to default in a year. PresidentLaurent Gbagbo’s government pledged to pay creditors, without specifying a date. "We will be making the payment," Alcide Djedje, foreign affairs minister in Gbagbo’s administration, said in an interview in Addis Ababa, where he’s attending an African Union meeting. "We do have the money of course. We have been paying civil servants. I don’t have a date yet but we will definitely pay."

The West African nation, which the International Monetary Fund says had $3.28 billion of foreign-currency reserves as of September, has been in political stalemate since incumbent President Gbagbo, 65, and his rival Alassane Ouattara, 69, both claimed victory in the November elections. Clashes have led to at least 271 deaths and caused thousands to flee the country, according to the United Nations.

The $29 million of interest that was due by midnight in New York after a 30-day grace period hasn’t been received, constituting an "event of default," Thierry Desjardins, the Paris-based chairman of the London Club group of commercial bank creditors and vice president of sovereign debt restructuring at BNP Paribas SA, said in an e-mail today. The trustee is responsible for the official confirmation of default, he said. Robert Rywkin, the New-York based trustee at Law Debenture Trust Co., said yesterday his firm would send out a notice of an event of default "not more than a couple of days later," once it has assessed the situation. He declined to comment today. "I expect people will wait and see for a settlement of the political situation" before they pressure the country to pay, said Desjardin.

The Eurobonds, sold last April by the world’s biggest cocoa producer, jumped 10.4 percent to 40 cents today, based on bid prices quoted on Bloomberg at 4:09 p.m. in London. The bonds fell to a record-low 36.25 cents on the dollar yesterday. Investors may be buying because accrued interest is open to any buyer after the default to claim, Stephen Monks, assistance director of London-based brokers Exotix Ltd., said by phone today.

The Emerging Markets Traders Association said the bonds should, unless otherwise agreed, trade "flat," in guidance published on its website late yesterday. The guideline means the buyer doesn’t pay for accrued interest separately from the purchase price of the bonds, Aviva Werner, general counsel at New York-based EMTA, said by phone today. "It takes into account they might pay in the next week, month, year, so it’s an all-in price; the buyer is due to all past interest," said Werner, adding that EMTA is classing the non-payment as a default.

Election DisputeGbagbo, who has ruled since 2000, has refused to cede power, citing a ruling by the Constitutional Council that annulled votes in parts of Ivory Coast’s north on fraud allegations and gave him victory. Ouattara, a former deputy managing director of the IMF, is recognized as the election victor by the UN, the U.S., former colonial ruler France, the African Union and the regional Central Bank of West African States. He is seeking to starve Gbagbo’s government of funds to pay the army, which has maintained a blockade on the hotel that has become his headquarters. The region’s central bank, also known by its French acronym BCEAO, said it shut its offices in the commercial capital, Abidjan, on Jan. 27.

Ivory Coast’s reserves held at the BCEAO mean the country will be able to pay the money owed on its bonds should a resolution to the political dispute be found, according to Samir Gadio, an emerging-market strategist at Standard Bank Plc in London, which trades the bonds and hadn’t received payment. The "significant upside potential" may make the country’s debt sub-Saharan Africa’s best performer this year, Standard Bank said in a Jan. 17 report.

"This coupon is a small payment, it shouldn’t be any trouble to Ivory Coast’s cash flow in a normal situation," said Felix Dornaus, who owns the debt among about 1.4 billion euros ($1.9 billion) of developing-nation assets he helps manage at Erste Sparinvest KAG in Vienna. Erste hasn’t received payment, he said in a phone interview today. "Investors will give Ivory Coast the benefit of the doubt, professional Ivory Coast investors are used to the necessity of being patient with this country," he said.

Brady BondsIvory Coast reneged in 2000 on $3.5 billion of Brady bonds, securities created as part of a debt restructuring plan for developing countries and named after former U.S. Treasury Secretary Nicholas Brady. "They’re going to have to build up their credibility" after the political crisis is over, Yvonne Mhango, a Johannesburg-based economist at Renaissance Capital, said in a Jan. 28 phone interview. The country "keeps taking a step backwards. In terms of both of foreign direct investment and portfolio inflows that’s a concern going forward," Mhango said.

The country was divided into a government-controlled south and rebel-held north following a military mutiny in 2002. Gbagbo, who came to power in the 2000 elections, remained in control of the south under a peace agreement in 2003. He has delayed voting after his mandate expired in 2005. The election last year was aimed at reuniting the country. The conflict has partly revolved around the issue of nationality with Ouattara barred from participating in the 1995 presidential election on the grounds that he isn’t Ivorian. Millions in the Ivory Coast, especially in the north, have parents from neighboring Burkina Faso and Mali.

Debt RestructuringIvory Coast issued Eurobonds last April as part of its debt restructuring at a yield of 10.181 percent, according to the London Club’s Desjardins, and data compiled by Bloomberg. Duncan Smith, a London-based spokesman for Citigroup Inc., the paying agent on the bonds, declined to comment and referred questions to the issuer, in an e-mail today.

Ivory Coast produces a third of the global supply of cocoa and depends on the chocolate ingredient for more than 25 percent of its export earnings. The economy has expanded 1.7 percent a year on average since the civil war ended in 2002, according to the Africa Economic Outlook report. In October, the IMF forecast that gross domestic product would increase 4 percent this year. Cocoa production is expected to expand to 1.3 million metric tons percent this year, from 1.2 million tons last year according to a Dec. 6 Macquarie Group Ltd. report.

Cocoa PricesCocoa prices have hit one-year highs on concern the political crisis is disrupting exports after the European Cocoa Association and Federation of Cocoa Commerce Ltd. said there is a "significant slowdown" in flows from the country. The last country to default was Jamaica on its domestic bonds in January 2010, after the island nation was hurt by a drop in tourism and remittances because of the worst global recession since World War II, according to Moody’s Investors Service. "Will creditors be patient indefinitely? Certainly not," Erste’s Dornaus said. "There will be some point in time when we investors will do something, accelerate payment or whatever."

When it comes to media appearances, major hedge fund managers can be a rather reclusive lot. Unless your name happens to be Hugh Hendry.

During this week's Alternative Investment Conference in London, the iconoclastic speculator waxed philosophical about his own "self loathing" and the "voices inside his head", described indirect ways to play the Chinese property bubble, and explained how desperate he is to "see inside the envelope waiting in the future which contains my 10-15-20 year performance results."

Hendry's keynote was facilitated by author Steven Drobny, who explained that his goal for this interview was to "get inside the head of Hugh Hendry". Also of note, Drobny publicly revealed for the first time that Hendry was in fact the anonymous 'Plasticine Man' featured in his recent bookInvisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money.

While Hendry declined Drobny's Freudian-esque invitation to recline on a couch brought up on stage specifically for him, he did play along with Drobny's word association game. When prompted with the names Ben Bernanke and Vladamir Putin, the same two words popped out of Hendry's mouth: "evil genius". What does that reveal about the way Hendry thinks? Perhaps not as much as the below conference highlight reel which was dubbed "Hugh Hendry's Greatest YouTube Hits."

Hendry's growing notoriety has managed to attract attention on the other side of the pond. In a NY Times profile last summer the Eclectica boss quipped “If there was a way to short Obama, I would”. At the conference he clarified that his remark was not directed at President Obama personally per se, just his policies.

For Hugh Hendry followers much of what he said at the conference may be familiar, but here are a few of the highlights:

The euro is "mortally wounded but can limp on for awhile at the expense of ordinary people, making it expensive to speculate against".

His best trades are the ones where he doesn't "fear the consequences of being wrong".

He's not positive (bullish) on any country.

In his own opinion, one of the keys to his success is that from an early age he was "taught to misbehave."

When it came to talking specific investments themes, Hugh outlined his bearish stance on China: "the only thing unique about China's economic strategy are the sheer numbers". Fundamental to his bearishness is the fact that so much capital in China has been directed for sovereign, rather than purely economic purposes.

He compared China to a "sun moving other planets", and that "it's best not to short the mainland but instead short the satellites" or "dark side of the moon" as he called it. As such Hendry has a significant "basket" of Japanese credit default swaps with a four year time horizon. He discussed the evolving Japanese steel industry and his expectation that Japanese steel exports will contract significantly in the years to come.

Like Jim Chanos, he is extremely bearish on Chinese commercial real estate and even provides a guided tour of empty Chinese high-rise buildings in the below video.

Whether or not Hendry's bets will pan out within his time frame is an open question. But what is without question is that the financial world is certainly a more interesting and entertaining place with the outspoken Hugh Hendry.

The global consumption of fish has hit a record high, reaching an average of 17kg per person, a UN report has shown. Fisheries and aquaculture supplied the world with about 145m tonnes in 2009, providing about 16% of the population's animal protein intake. The findings published by the Food and Agriculture Organization (FAO) also stressed that the status of global fish stocks had not improved.

It said that about 32% were overexploited, depleted or recovering. "That there has been no improvement in the status of stocks is a matter of great concern," said Richard Grainger, one of the report's authors and FAO senior fish expert. "The percentage of overexploitation needs to go down, although at least we seem to reaching a plateau," he observed. The authors added that it was estimated that the level of overexploitation had increased slightly since 2006, but 15% of the stocks monitored by the FAO were either "underexploited" or "moderately exploited". This meant that catches in these regions could increase in order to meet the demand for fish products.

Big businessThe report also showed that fish continued to be the most-traded food commodity, worth US $102bn (£63bn) in 2008 - a nine percent increase on the previous 12 months. China remained the largest fish-producing nation, producing 47.5m tonnes in 2008 (32.7m tonnes from aquaculture and 14.8m tonnes from capture fisheries). Globally, the data showed capture fisheries produced about 90m tonnes, with 80m tonnes from marine waters and a record 10m tonnes from inland waters.

The authors said aquaculture remained the fastest growing animal food-producing sector, although growth rates were slowing. Per capita supplies from the sector had increased from 0.7kg in 1970 to 7.8kg in 2008 - an average year-on-year growth rate of 6.6%. Aquaculture was dominated by production from the Asia/Pacific region, accounting for 89% of global production and 79% in terms of value.

Closing the netWhile aquaculture was set to become the main source for fish products in the near future, the authors were concerned about the growing percentage of marine fish stocks that were categorised as overexploited. They said that most stocks of the top 10 commercial species, which accounted for almost a third of global catches, were fully exploited.

"Of the 23 tuna stocks, most are more or less fully exploited (possibly up to 60%), some are overexploited or depleted (possibly up to 35%) and only a few appear to be underexploited (mainly skipjack)," they wrote. "In the long-term, because of the substantial demand for tuna and the significant overcapacity of tuna fishing fleets, the status of tuna stocks may deteriorate further if there is no improvement in their management."

They said another threat to the long-term sustainability of fish stock was illegal, unreported or unregulated (IUU) fishing. According to Illegal-Fishing.info, managed by think-tank Chatham House, IUU was worth up to $23.5bn a year.

In an effort to tackle the problem, the FAO established the Port State Measures Agreement (PSMA) that would require the "port state" to close its ports and ban the landing of fish of any vessel listed as being involved in IUU activities. Last year, researchers writing in the journal Science warned that global measures to regulate the fishing industry lacked the capability to tackle illegal catches. During a six-year study, they said that only one third of the vessels listed on IUU registers could be tracked. The FAO report authors also highlighted another problem facing the world's fisheries: "high levels of unwanted and often unreported bycatch and discards... including the capture of ecologically important species".

"The latest estimate of global discards from fishing is about seven million tonnes per year," they said. As a result, the UN agency will lead the "development of international guidelines on bycatch management and reduction of discards". The publication of the report, The State of World Fisheries and Aquaculture 2010, coincided with the opening of the 29th session of the UN Committee on Fisheries being held at the FAO's headquarters in Rome.

97 comments:

I think the answer to your question depends on a matter of perspective.

Right now, the delusion forces the conclusion that we are, but it's going to get far worse and quite quickly.

I still think it'll be this summer or fall (with the NFL lockout cancelling the 2011 season playing a major role in shattering said delusion) before we see the riots, but the goon squads will be out far faster here than in Egypt.

The Banks will have it all! They must have it all or they will die. $700 billion from the US Treasury in 2008 is not enough. Borrowing billions at 0% interest at the FED's Discount Window and investing it in Treasury Bonds and other interest bearing instruments at pure profit is not enough. Trillions more infused directly into the banks by the Federal Reserve is not enough.

The Banks must have the public employee pension money of workers in New York City. It will not be enough. The Banks must have all the pension money from New Jersey to Florida to California.

The Banks must have the money directed to stave off destitution among elderly Americans. The Banks must have the people's Social Security payments. It will not be enough.

The Banks must have the money directed to working people's health care. The Banks must have American's Medicare and Medicaid benefits. It will not be enough.

The Banks must have the funds directed to public education in the States. Schools must be shut down. Teachers must be layed-off, starting with the most senior. The teacher's with the highest salaries and benefits. The idea of universal public education must be discredited so the whole system can be shut down. It will not be enough.

The Banks must have the proceeds of the international drug trade. The Banks must have the funds generated by the payday loan business, the sub-prime auto and home loan businesses, the student loan money generated by the for-profit colleges.

The Banks must have it all! They must have it all or they will die. They will die anyway. The only question is, will we die with them?

Egypt's population is estimated to be 80 million or so. In 1900 the population of the US was less than 80 million. The crowding depicted in New York City in 1900 was trivial compared to that of present day greater Cairo. Can any new government improve Egypt's lot? The current US population is almost four times that of Egypt but with a lower growth rate. Is the post peak carrying capacity of Egypt relative to the US anywhere near 26 percent?

If you asked spouse (and majority of people), he/they would say that they don't care what goes on in Egypt, it doesn't affect them. It's over there.

My response is that if (when) the protests escalate and move to Saudi Arabia, then we care because the price of oil and gas for our cars will escalate in price, a lot. And, perhaps the gas might not be able to be delivered to the gas stations because of the expense.

Their response is that it hasn't happened yet, so why worry.

Then, on top of that discussion, we had a 1-day electric power outage because of a huge ice storm. The extra flashlights, lanterns, and batteries that I had stockpiled, were great for light. The gas-fired water heater gave hot water for showers. The gas log fireplace was turned on for some warmth. And I learned how to manually light my new model gas stove to cook food. Spouse had a battery with an inverter that we could plug in a radio so we could hear the local weather and news.

But spouse missed reading his email, and so we got into the 4-wheel-drive truck to get WiFi at McDonalds, and bring lunch back to the neighbors. While I missed the Internet for reading TAE, the lack of Internet access concerned me more for banking and paying bills. Maybe now's the time to convert back to manually writing checks, assuming there will be money electronically deposited for Social Security and pensions.

The contrasts between Egypt (Yemen, Tunisia, etc.) and the USA are very stark. To think that riots would result from an NFL lockout is rather extreme. YES, violence will probably rise...but I would posit domestic violence, not rioting in the streets. (American men are a pretty pathetic bunch. Better to beat up on your spouse than face the cops in the streets.)

YES, food prices are skyrocketing. YES, energy prices are skyrocketing. BUT...the U.S. government has the digital printing press, and (IMO, of course) there is pretty much nothing stopping the .gov from, if it needs to, adding hundreds of billions in liquidity to such programs as Food Stamps (SNAP) and Unemp. Insurance, funds, etc.

The .gov is MOST concerned with social order and calm. Every ounce of their energy is focused upon keeping it...and they have lots of tools to yet deploy in order to keep the people happy (sedated, confused, pacified...however you want to put it)

Remember, there ar NO OPERATIONAL CONSTRAINTS---only political ones---to the FED's ability to create money. We have a long long long way to before the people clamor for regime change.....in the streets.

So much to digest. Per Ilargi's post on 1/14/11 "It all starts and ends with US and European real estate, the one biggest investment of those of us living on Main Street, by far." At the same time I am facing remodeling my parents home for their needs as they age in place. AARP has some excellent info here, http://www.aarp.org/home-garden/home-improvement/ and I see potential for trading services to help the newly aware boomers as they hit 65 and realize their homes need to meet the needs of their own frailer bodies. So I plan to learn as much as I can regarding making a home more accessible, more multi-generational and more about helping others do the same. It's either that or become an expert in re-purposing empty mall stores into privatized prisons. (After all, they have the roll-down bars already in place.)

You're an interesting guy, and you happen to live only a couple of hours down the road from me. I get to Montreal quite frequently, since I have lots of friends there. I'd love to chat if you're available next time I'm around. I typically spend my time on the Plateau. I'll try to arrange a visit there before I head off for Europe again on the 12th.

@Bluebird - I know the feeling. My spouse, kids, etc. are "less than enthusiastic" about my concerns for the immediate and longer term future.As to how the events in Egypt and other Mideast states effect us, I imagine you can agree that we should all be more concerned that THESE PEOPLE GET JUSTICE AND A FAIR SYSTEM whether it costs us some discomfort or not.

@Scandia - Not from Canada of course, but this comes up for me anytime from here in Indiana.http://english.aljazeera.net/

Back to the mortgage question for a moment. It seems to me that since the taxpayer is going to be on the hook, why not just remove the banks. Setup public state mortgage agencies that can create money like banks, and issue mortgages for the cost of building a home or equivalent along with a fair rent for the land and the homeowner then pays back the state or locality with their payments which interest can then be used to finance state expenditure removing property tax. If the mortgage defaults then the state takes back the property and can lease it or resell it. The property then becomes a resource and source of wealth for the community and speculation can be eliminated as only people wanting to live in a property would be able to buy it.

The massive influx of rural populations to cities is indeed a terrifying phenomena.

Given that cities have eco-footprints 2-3 orders of magnitude greater than their domestic biocapacity, the relatively rapid decline of the velocity of money will result in massive overshoot of local carrying capacity (collapse of global trade assumed) and thus massive urban mortality.

I wanted to write yesterday, but didn't for obvious reasons, that I was wondering what would have happened if Anderson Copper would have been killed by Mubarak goons on the streets of Cairo. Anderson was attacked again today, along with everyone who looks like a journalist, the hotels they stay in are under siege etc. Time is fast running out for Obama, and EU leaders, certainly Britain, which has a large contingent in the region, to say time is up for Mubarak. It looks like large scale bloodshed may ensue if they don't by, say, tomorrow, when Mubarak's first real deadline for leaving runs out. Perhaps going into tonight he's planning to be one step ahead of that deadline.

My response to the unwarranted accusation of being "anti-Semitic" (whatever that means) has been deleted by Ilargi. I kindly ask you, Ilargi, to either delete such ridiculous and petulant accusations when they are made or to allow me a proper response. Thank you.

People who live in glass houses should not chuck stones about.

Can any new government improve Egypt's lot?

Robert,

Absolutely. The GDP of Egypt is 4 times that of Luxembourg and the population of Egypt is 140 times that of Luxembourg. Per capita GDP is 35 times greater in Luxembourg.

Luxembourg has a fantastic location between Germany, France and Belgium. People in all these three countries try to fill their tanks in Luxembourg, for example. In a similar way, Egypt is on the edge of Europe and has huge markets everywhere around it. It should cost a fraction to ship stuff by sea from Egypt to Marseilles or Antwerp compared to the same things from Shanghai. More importantly, it takes far less time - days versus weeks. Much less need for airfreight or stock-keeping. For example, the same ship can carry probably 4 times as much merchandise per year on these shorter sectors. I am not suggesting that Egypt should go into "financial services" like Luxembourg - there has already been far too much of that and they have their own bubble problems. However, I am sure that Chinese/Japanese/Korean manufacturers would be falling over one another to do their final processes in Egypt - sending the components and suchlike from the East to start with. Components occupy far less space than finished products - just look how much empty space there is inside your PC and think of the wrapping it came it. :)

However, the problem (just like in the USA) was never an economic problem - it is a political problem. The US, UK, Israel, France, Italy, Spain and so on do not want to have an economically successful Middle East. For Israel, the reason is pretty obvious - they would be out-competed all the way down the line and Israeli manufacturers would want to move their operations to Egypt. Also, there is the demographic aspect. Loads of Israelis would go back to Russia, America and so on - a failure of Zionism. The UK may not lose much manufacturing - there is not all that much left - but they would not be able to sell crappy second-rate weapons to dictatorships and pretend that the map is still one-quarter pink. France is in a similar position. Germany does not need cheap labour - they already have their Lebensraum in the East as that is where they are moving the simple manufacturing.

Egypt does not have a social-security system like Europe's - they are still family-based like China and India. This is a huge advantage.

In 2007 Africa reach the same number of mobile phone subscribers as USA/Canada.If you want to see what can be done, check out Orascom. Despite all the problems of operating out of Egypt with its Mafia-regime and traitorous leadership. Essentially, they have been thrashing other, big name, mobile telecom companies in much of Africa (page 12). It is thanks to them that mobile-phone usage in many of these countries is as high as it is. Western telecom companies thought Africa, because of its poverty, would always be a niche market.

The Sawiris brothers are distant relations (by marriage). I have never met them.

Around 30 years ago, my Dad was already losing it and went back to Egypt. He was in his 60's and frail. He went back to the desert to some of his old geological prospects with my Mum and an ancient driver who used to drive us as kids. The driver did it not for money but for fun and nostalgia's sake. When we left Egypt, he had gotten a job driving one of the richest men in Jeddah (Saudi Arabia) for many years - he had around 10 luxury cars to choose from and to keep spotless over there (as well as many wives to ferry about).

They didn't go very far off the Nile valley before the army tried to stop them. They just put on full speed and got out of range of the shots being fired in their direction.

Who is fooling whom? Everybody in Egypt knows that the army is the problem. The army was never designed for winning wars - it is an extension of the Police state.

John Andersen: I think this is where it's heading. I think you're going to see the frogs being stewed in this country - and when the circuses are cancelled (the NBA is also staring a lost season in the face right about at the same time!), that'll finish it off.

I know we've said it for several years now, but it does seem like the budgetmeisters are finally moving in for the (very literal!) kill this time.

I can understand what you are saying, but it really is beginning to appear as if a number of factors are playing into a Fall 2011 breakdown.

As I just got done saying in the last post, Federal and State budgeteers are going to be attempting to slash vital benefits to the point where people WILL die.

As long as it is an individual pathetic (as you propose) act, then we can all laugh it off or the like as "one crazy kook".

But what happens when that one becomes 100, or 10,000, or 10,000,000 -- and none of them are thinking they're going to survive the winter anyway?

I've seen videos of riots and the like, and one thing has come to my attention: We've got a lot of people in this country who are waiting for the opportunity to be violent. They just don't have the medium-or-larger level catalyst to become part of a mob culture which is going to rampage everything.

That's one of the major differences between us and Egypt: They might actually be fighting for something larger than themselves. Most Americans wouldn't give two shits about doing so. (They might _say_ so, but the truth will be shown otherwise.)

You are most correct that there are no constraints to the amount of printing -- but understand that there are people who now believe that the value of the dollar will VERY QUICKLY HALVE. (There was a report in the last couple of days that any sustained break of 77 in the Dollar Index (the DXY, if I recall correctly?) sends us to about 40, half of the value now.)

I've already got people in my life on the brink. Double the price of everything, and it's over for them.

Taking some of the bread will cause small-scale events to occur, which most will laugh off because they (in their hearts, whether they admit it or not) want "them" to die anyway.

Taking the circuses on top of it? Hoo boy.

That's why I think we need to keep an eye on things here for Fall 2011. What you are seeing in Egypt is a massive prelude (and I think a training exercise for those in power).

Centurie IXL.The false trumpet concealing madness will cause Byzantium to change its laws.From Egypt there will go forth a man who wants the edict withdrawn, changing money and standards.

Centurie IILXXXVI.Wreck for the fleet near the Adriatic Sea: The land trembles stirred up upon the air placed on land: Egypt trembles Mahometan increase, The Herald surrendering himself is appointed to cry out.

Centurie IIILXXVII.The third climate included under Aries The year 1727 in October,The King of Persia captured by those of Egypt: Conflict, death, loss: to the cross great shame.

Centurie V.XXV.The Arab Prince Mars, Sun, Venus, Leo, The rule of the Church will succumb by sea: Towards Persia very nearly a million men, The true serpent will invade Byzantium and Egypt.

"Nassim said...My response to the unwarranted accusation of being "anti-Semitic" (whatever that means) has been deleted by Ilargi. I kindly ask you, Ilargi, to either delete such ridiculous and petulant accusations when they are made or to allow me a proper response. Thank you."

Starcade said "Anyone who has a firm grasp on what is going on today has to think that's coming here in fairly to very short order."

The issue within my circle of family and friends is that they do not have any grasp what is going on today in the world. They are clueless that the protests/violence in Egypt could ever come to the U.S.A.

Not going to happen in their lifetime. It's buy, spend, charge credit. Until they are personally affected, in some drastic manner, nothing changes.

I fear that this scenario in Egypt, which is at it's heart an economic problem thanks to rising commodities prices, is but the first of many. Panic buying by big nations of grains seems to have begun, sending rice prices to new all time highs:

I tried to read Nostradamus several times but never made any headwind. I tried in English and in French. I would love to understand him as I am a superstitious person. I believe in luck - good and bad - and in the evil eyes (the negative power of envy). In fact, I always keep an Eye of Horus over our door. This has nothing to do with religion.

The only thing that I am fairly sure of is that Egypt, Persia, China and India will be around for a long time.

Much as I've tried, Nossie's quatrains cannot be sufficiently misinterpreted to afford the possiblity of predictive relevance.

I tend to agree with Starcade; globalised MI-complex powers, having no loyalties to Egypt, are likely manipulating both sides. In addition to effecting psychological conditioning of foreign populations, these events seem to be channelled by certain factions working towards a controllable destabilisation of the region, they may attempt the sequential overthrow of all established political authorities who are seen as corrupted by the disenfranchised populations, some of these factions would preferably facilitate a new hostile front of extremism.

Since the entire region is helplessly oversaturated with restless youths, demographic imperatives extended into politics would traditionally necessitate myriad mass-casualty wars to thin out the surplus and remove imbalances that would otherwise make social or political restabilisation impossible, power elites in all arab nations may have similar depopulatory demographic motivations to war, in order to prolong hierarchical stability.

Sorry, I'm not going to pay $45 for this: http://fosslira.blogspot.com/

Just like I won't for http://www.chrismartenson.com/ stuff.

If you were truly interested in helping people understand what's going on, and how to prepare, you would make it free.

One has to wonder. Profiteering from disaster is not cool. And btw the way hyperinflation is BS.

Since I’m underemployed, and have time, to uncover the truth, plus I’m educated, I have come to realize there are a lot of folks on the Web who making money off of fear.

In short, here’s how I see it.

1) We’re in a Depression, worst than the last one.2) Jobs are not coming back, and unemployment will get much worst.3) Real estate is done, and homes have further to fall.4) Peak Oil is the main driver of this global down turn, and things just get worst going forward, globally.Of course Wall Street was spark that started all of this in 2008, though this has been along time coming.5) The debt in the the US was caused by stupid politicians and pundits, Rome is burning once again.6) The debt is now so large, like Rome, we’re screwed. But hyperinflation, isn’t in the cards for some time to come.As long as the US can import oil through military force, and the dollar is pegged to oil, hyperinflation won’t happen.(Both of which I can’t stand.)7) Those who thing a gold standard is going to change things, I say BS. With 7 billion people on this planet, there’s not enough gold or silver to make the standard work. This talk comes from gold bugs, who want to profit from fear. Plus, a gold standard would make everyone less wealthy, think about it. Which is fine by me.8) Finally, going forward, we our in what is called the Fourth Turning. In my view, once again, the main driver of this is Peak Oil, over population, global warming, massive global corruption, the American empire, which is just out of control, because it’s on its last leg.

So, what do we do? First, most people, even people I know, would not agree with the 8 points above, nor have they heard of Peak Oil, etc.Those that are aware, I have to agree with The Automatic Earth, JHK, and “some” of Max Keiser’s suggestions, though I think he’s also a gold/silver bug, for profit, which I don’t like.

Quite frankly, most people don’t have many options. One because they’re so in debt, they have no options. If one had the means, here’s what I would do, providing you know how to be self-sufficient, which most American’s are not. 1) Buy land, where you can, that allows for food production. Though, in America with a population of 300 million plus, there’s not enough land to do that. 2) On the land, again if you can find some, build a super-insulated home that is passive solar. Having a home like this will require almost no fossil fuels to heat it, and no AC either.While the economy is still going along via the FED, invest in solar and wind for your new self-sufficient off the grid home. Solar and wind technology will work almost anywhere, and will last around 25 years. I would also have some back-up systems in place, like wood burning stoves, and yes, not great for the environment.

If my above suggestion doesn’t work for you, transition towns should work for a number of folks. In short, I think a lot of people will survive, if you’re willing to come to terms with what’s coming. If you don’t you won’t. Learn to live with less, without much money, stay fit, those who are will fair better.

And I think the greatest crime is that those of us who see it, but are shocked at how long TPTB have been able to hold it together, are decried because TPTB have been able to hold it together this long.

That's probably what is happening with your family.

Some of us, however, feel as if the noose is tightening around our necks, and the tone of our voices shows how angry we are getting with it.

What is interesting here, from my perspective, is that they chose to interview someone from the Egyptian branch of the Moslem Brotherhood. If they had asked any Egyptian Christian or judge or doctor and so on, you would probably have had a similar reply. The Moslem Brotherhood coexisted with Mubarak and his predecessor in a sort of symbiosis - they needed one another. Sadat was supposedly killed by Moslem Brotherhood members, fair enough, I accept that. However, who paid for it and who was using the Moslem Brotherhood as a front? Simple, find out who benefited most from the disappearance of Sadat from the scene.

If you think that I am unduly conspiratorial, take a look at Lvon Affair of 1954 This Wikipedia article claims it was an unsuccessful operation. In fact, it was 100% successful and helped set the ground for the destabilisation of the Jewish community in Egypt. Two years later, the Israelis, British and French invaded Egypt simultaneously.

As they say, the rest is history. The Jews of Egypt had to choose between staying or leaving and almost all of them left. Most of them did not want to leave. Many of them were wealthy and living as the Germans say like God in France. Everyone knows that Manchester was a very wealthy city in England at one time because of its cotton industry - much of it Jewish. Well, guess where the cotton came from and who were the biggest traders.

I have speeded up www.rideswap.co.uk by allowing people to see the 10 latest blogs. This is of especial interest to those with a slow link. If you want to see all blogs, please select that option. Unfortunately, because of the time difference between me (Melbourne) and the server (EST, I think), your browser may take a while to accept this default so don't worry. :)

We are trying to help people here at TAE. What I will say in that debate I have already said here, freely available to all. I have also given many interviews (all for free) that are available on the web. I didn't set the terms for this debate, but I did agree to them.

Occasionally we must do things that support TAE's continued existence. I think that's better than having subscription fees. This way support is voluntary and comes from those who can afford it. This particular debate seems to be of interest to a number of different finance sites, and is therefore an opportunity to draw in support for TAE from new directions. That additional support will help us to keep doing what we do here, which is to explain the big picture to anyone who's interested.

The comments always end up on the thread they were posted to I'm afraid. We have no way to change this. All we can do is publish or delete, not redirect. If a comment doesn't appear, the most likely explanation is that it's ended up on a previous thread, since we hardly ever delete anything.

Unfortunately sometimes there's a gap in comment moderating when none of the few of us that do it are available for a while. We try to keep the gaps as short as possible. It might get harder when I travel back to Europe though, as we'll have no moderators on North American time while I'm away, and Ilargi and I will sometimes be traveling together with no internet access for several hours at a stretch. We'll do our best to deal with comments in a timely fashion.

Stoneleigh, why not make an exception just in Moo Moo's case and suggest that he give that 45 dollars to a charity for the needy and then you will let him (or her) attend free. LOL, lotsa luck, even in that, I think.

I am impressed by the crowds gathering in Cairo and Alexandria!!!Can't help wondering if that is all we have to do to get the banksters and their paid poodle politicians out of the system. Especially when the regulators are MIA.Especially when the bonus pot is larger than ever while the screws of austerity on everybody else tighten.Especially when we are into the 3rd year of our societal crisis and not one squid is in jail. I guess joining the ranks of "presidential advisor " provides pardon for all past, present and future crime.

@Moo Moo - You made a lot of good points in your comments! I would add that this choir has much of that sermon rather well established in their own minds.On point no. 5, I would add also, "a lot of silly over-spending and McMansion castle-building by many folks in the so called middle class." What we need desperately (or is it too late?) is a lot of simplification, localization, and a remodeled media arrangement. The TV is a game changer! We are arrogant, wasteful, and politically brainwashed all around. As of now we are "f"ed as in "Fox"ed.

IMO though, you are dead wrong on the motivations and needs of TAE. I hope you will rethink that one and say so.

My primary argument stems from certain operational truths under a fiat currency system---and in this case, the dollar...which remains a very important world currency.

Under this system, as you know, the FED can, with but a few computer keystrokes, add trillions to the reserve accounts that fund Social Security, Medicare, Food Stamps, etc. The decision NOT to do so is political, NOT operational. AND, since the .gov is primarily concerned with maintaining a passive and compliant citizenry, when push comes to shove, I believe that even the most monetarily hawkish of our political leaders will approve increased spending and QE...because the alternative could be "Egytian", as it were.

NOW, that said...the chances of a massive black swan type of event rises daily, as the U.S.'s destabilizing monetary policies push the world into an increasingly chaotic state. But from a purely operational standpoint, the 'printing presses' will keep the majority fed and housed in the near term.

@p01, Also for Cdns only:PM Harper has come out in support of Mubarak staying until September.But then what else should I expect from a PM who kettled the citizens of Toronto duing the G20 summit.Discouraging all the same...

Alarming hush on Al Tahrir Square "This odd hush is frightening. As if by magic, not only the most aggressive supporters of the regime disappeared but also the reporters, although nothing is yet over and the crisis is not resolved"[...]"When I left the Square late last night, the rebels were already in control of Qasr al-Nil Bridge. Whereas the previous night it had held supporters of the regime, now the bridge over the Nile was absolutely empty. For those who recall the lessons of the Russian Revolution, control over the bridges is not mere empty words but much more significant than retaining the square near the Egyptian Museum."Scary.

Latest GDP figuresReal gross domestic product -- the output of goods and services produced by labor and propertylocated in the United States -- increased at an annual rate of 3.2 percent in the fourth quarter of 2010

This didn't match what you were expecting from the CMI figures does it Ilargi? Comments?

Did anyone notice in the chart of employment-population ratio from the Claus Vogt article that the 2001 recovery was very slow, and at this point there is no recovery from the current…err recession? If it is a trend, it’s a rather scary one, though I suspect no surprise to most readers here.

On a rather long aside, my profession, accounting has really caved to the desires of corporate America. It’s clear that they have either identified too closely with the people they certify, or are at the least are captured by the money and power of them. One would have thought that they would have learned from Enron and Arthur Anderson’s demise, but apparently not, e.g. Lehman Bros Repo 105. That situation would qualify as what’s called “Constructive Fraud”, a criminal offense in my book, but then the opinion of a peon (another word for serf) is of no importance. Still I wonder how many lawsuits Ernst & Young are facing right now. All this points to is more proof of the corruption of the system Stoneleigh talks about, and I will add “an absolute failure of leadership” both in government, and from private enterprise.

Though a small segment of Jews have responded to right-wing voices from Israel that lament the change and fear that a democratic government would bring to power fundamentalist extremists who wish to destroy Israel and who would abrogate the hard-earned treaty that has kept the peace between Egypt and Israel for the last 30 years, the majority of Jews are more excited and hopeful than worried.

Few archaeologists have been given access to Saudi Arabia, which has long been hostile to the discipline. Hardline clerics in the kingdom fear that it might focus attention on the civilisations which flourished there before the rise of Islam – and thus, in the long term, undermine the state religion.

If you read the place name research of this archaeologist, Kamal Salibi, you will quickly understand why the Saudi Arabians do not want serious research into their Western province. Briefly, there is a far higher correlation between place names in the bible and place names in Saudi Arabia - and the topography matches better - than is the case for Palestine/Israel. In fact, the Saudis and the Israelis are in complete agreement over this one :)

Here is another interesting bit of place-name research that seems to point to the Israelites having crossed one of the salt lakes rather than the "Red Sea"

Frankly, I know almost nothing about the Bible and I am not at all religious so if anyone has questions or wants to argue about the contents of these articles, I would not be able to reply for or against. All I am trying to show is that a lot of the "certitudes" that we are fed with as soon as we go to primary school are so much speculation in fact.

I remember going briefly to a primary school in Ireland where the divinity teacher told the kids that the Israelites built the pyramids of Egypt. I pointed out that the Israelites came to Egypt thousands of years later - which she did not believe and ignored as childish nonsense. :)

Wars and occupations are often based on such emotional baggage that people find hard to discard.

@ StoneleighThanks for the reply. I see your point, and respect it. I also appreciate you talking the time to respond, like JHK does. Max does not.

@ logoutThanks for your none productive comment.

@ HombreJust stirring the pot. I like and respect Nicole, JHK, Max Keiser, and a host of others. Though, no one should take anyone of these folks at face value. Meaning, learn from them, but you must decide for yourself. If you don't, going forward, you may regret not thinking for yourself as well as not doing your own research. That's all I'm saying.

I so wish he would keep quiet. He and his ilk have hardly brought prosperity to Iran. He is another parasite with a symbiotic relationship with America and Israel - he needs them to keep in power and they need him to show how the West is "threatened"

FWIW, his future wife was at our table at the party I mentioned here. It is a complex story and since some of the protagonists are probably still alive, I will not relate it here.

@DIYer - Seriously, me either, I'll leave the "-flation" debate to those who want to quibble about what color was the car that ran them down. Still, if I had to bet my little stash on the line I would put it on the StoneLady.

@Moo MooMax is not the only one. (Behold the Boomer Bullshit):[...]Paul Farrell, Chris Martenson, Charles Hughes Smith, Louie Psyhoyos, Michael C. Ruppert, and George Ure have all influenced me and my thinking, and I have respect for these Boomers. But not one of these guys I’ve mentioned has ever answered a single email I’ve sent over the years or seemed to give a shit about anything of substantive community.[...]

Mrs. DIYer and I consider that day to be a wonderful opportunity to eat out downtown and not have to fight traffic and wait to be seated. We shall enjoy the Superbowl in our own way.

And I agree, I would bet on Stoneleigh winning the debate. But mostly I am a follower because she correctly predicted the economy of 2008 (without having to wait until 2009 to do so). Most of the other economy-forecasting sites do a so-so job of predicting the past.

I don't know if this is true but it certainly ties in with what usually happens. There are an awful lot of accounts that need balancing.

I don't want Mubarak's Consiglieri and torturer-in-chief get off so lightly. I want to see him put on trial and humiliated. I want him to let us know what he knew about 9/11 and many other nefarious goings-on.

"I so wish he would keep quiet. He and his ilk have hardly brought prosperity to Iran. He is another parasite with a symbiotic relationship with America and Israel - he needs them to keep in power and they need him to show how the West is "threatened" "

Exactly! They need fear of an enemy in order to get people to follow them or accept their policies. See the BBC Drama "Power of Nightmares" I believe.

I don't feel I can comment on the Iranian version as I know little of them or Iranian culture, but I have no use for the American version.

Btw, a friend of mine (American) was in Iran during the summer of 1978 with his father who worked for a US engineering firm. That fall when his father was back in the states, his subordinant was killed in a bomb blast. The company wanted my friend's father to come back and finish out the job. He refused, a very good decision in the end given it was now late 1978.

This blog is still resolutely in deflationist mode. Chris Martenson is still resolutely in inflationist mode (but with a 20% hedge).

What's a preparer to do? As Chris said, the responses to each of those scenarios is very different.

I wish all the conflicting view givers would get together and thrash this out, so we can all get moving the right way. But I guess there is no crystal ball, so what is the best course of action, given the lack of agreement?

@sofistek - Are the preparations for either of the "-flations" so very far apart?The party is over and the question is, do we depart rapidly (crash) or meander along QExx.In either case... IMO... * Get out of stocks* Get out of debt* Secure the sources of the basics of life, water, food, shelter.* Have a small and diverse stash of bartering items on hand, cash, 90%silver, hardware, FRIENDS!

Like was mentioned above, listen to all sources and make your own modifications depending on your particulars. Good luck!

What's a preparer to do? As Chris said, the responses to each of those scenarios is very different.

I wish all the conflicting view givers would get together and thrash this out, so we can all get moving the right way. But I guess there is no crystal ball, so what is the best course of action, given the lack of agreement?

I can easily see Stoneleigh's scenario playing out: inflation in necessary commodities (food and fuels) and deflation in everything else. It's already occurring in wages. I can barely make LPN wages working as an RN in home health, once I factor in the lost travel time for which we aren't paid. By the time I figure in the wear and tear on the car, even with the travel "allowance," I'm beginning to wonder if working as a telemarketer wouldn't generate just about as much income on a weekly basis.

@Nassim - Regarding religions and biases, I agree pretty much that these superstitious influences are much of what is wrong in the world.The fact that religion cannot be taught here in the states (in public schools) has lessened the social impact of Christo-exceptionalism.But it is alive and well among a large chunk of folks, maybe 25% to 30% and they do have a lot of political clout. Oddly enough these "Christians", generally speaking, are also the group(s) who push the warmaking and military spending the hardest, weaving chords of patriotism and Christianity into a single strand, and one can find hovering within, and at the edges of their ranks, the phobic-racist elements, barely transparent at times.It is shameful really!

You and I are from different worlds, cultures, and lands, and if we listened to many of those around us we would be "enemies." But we have to fend off such provincial nonsense and find our way, each of us, out of our respective religio-political boxes and grow beyond the constraints of the cultural biases into which we were born.

"Religion is regarded by the common people as true, by the wise as false, and by the rulers as useful." ~Seneca the Younger

Sure it would be nice if everything was free but you are not living with a species of angels ... we have some developing to do before we can all happily live in a state of true anarchy.

Now correct me if I have read you wrong but I get the impression that you feel that your ass should be saved and those who save it should should do that service for free? If so, that would mean that many knowledgeable people would be financially unable to do the very job you want them to do. That said, if you look around there are sites that are run by people who are financially secure and who do offer their services for free.One of those, no donation required, sites makes the suggestion that one make donations on a rotating basis to any site other than themselves that one gets value from. Sites that would not be able to continue without support.

But here I do agree with you, that one should think for oneself. I think that the first statement on any site should just that :

"Read me but THINK FOR YOURSELF".

Now if you go over to Fred on Everything and read this articleby him and then follow it with this next one I think you will get a laugh about thinking for oneself.

BTW For whatever it is worth to you, you get all this writing I am doing for FREE! (Free except of course for what it costs our host, TAE)

Hombre you get the big havana ceegar, you mentioned the magic word FRIENDS!

I generally hear the word NETWORKING!!! That reciprocal, unwritten, business arrangement which formerly buzzed about how to make a dazzling way in a yuppie world, a word that seems now to have morphed into describing a means to safety in our sadly failing world - a ne plus ultra gold star plan to rescue the yuppie bums from scraping on the rocks of their own contriving, as the tide of the grand affairs of men goes out... heh, heh!

I thought we are over this after so many explanations by Ilargi. He is not even trying to explain. Do you read TAE?

Rising prices does NOT mean automatically inflation. Rising prices, when the total amount of liquidity (money plus credit) is decreasing, means that these commodities are even less affordable than is the case for decreasing prices.

Relative value of cash increases in deflationary mode, the opposite is true for inflation. What else do you want to hear?

B Bernanke can hope for restarting economy by flooding the market by cheap money, but this will to nothing more than rise the price of essentials, since there is no way to "restart" the real and productive economy, so one can only restart speculative (fake) economy...

You can prepare for rising food prices very simply: be less dependent on them, grow your own food. The same for fossil fuels. DO NOT use them. You help solve climate change too. Simple as that.

The company wanted my friend's father to come back and finish out the job. He refused, a very good decision in the end given it was now late 1978.

Punxsutawney,

To please my lady friend - who thought that the revolution would be the end of all problems - I went to see the air force general who was running my airline. His predecessor had been recently arrested by the Shah. He told me that "bullets don't make distinctions based on nationalities" - i.e. that I should go. The airport was closed for weeks and I left as soon as I could. It was educational to watch the "respectable" besuited foreign businessmen coalesce into groups by nationality. A little later when Pan Am cancelled their flights, for example, there would be a scramble for British Airways, say, and little fights would break out between these groups. Of course, Air France, Alitalia, Lufthansa and so on cancelled and so the panic got ever greater and the shoving more frantic. I was working for Iran Air and they were delayed but not cancelled - baggage handlers went on strike. You should have heard the cheers when the plane took off.

My new employer, a big American company mentioned occasionally on TAE articles, were owed money by the airline and they asked me to go back to try to get payment. None of the senior American managers were up to it. I went back. The Iranians were very happy to see me again as no one had been visiting for a long while. I hardly mentioned the reason for my trip and the payment was instantly made. I took a holiday up at the beautiful Caspian coast and then went back to Amsterdam.

Some months later, I saw this same general playing roulette at the Palm Beach Casino, London. He didn't recognise me. I still have a lifetime honorary membership to some casinos - they all think that I might bring them a big roller. It is a great place to take someone for a really good meal in London without paying a fortune - the punters subsidise the restaurant. Here is their current menu Once, when entering, the lady at the entrance saw my name and told me that a punter had given her a racing horse called Nassim. The rich are different from you and me :)